My notes on the Agricultural Bank of China IPO preparations

The following were notes developed for an interview on BBC’s Asia Business News programme today (9 June 2010) on the forthcoming IPO of Agricultural Bank of China (ABC). My comments were ahead of the China Securities Regulatory Commission (CSRC) announcing later in the day if the IPO is a yea or a nay.

I thought I should just jot down some of the thoughts that will be on my mind on this issue.

1. I thought that the original size of the proposed IPO was just the bank testing the market. I do think the bank always had only about $20b in mind as the size for the IPO. I think the bank is being confident to get approval the size as part of the government’s need to mop up excess liquidity in the domestic market. The regulators are quite clearly going to par it down for several reasons – it has never been done before, failure would have repercussions on the appetite for Chinese bank offerings, there are already two other rights issues from more established names in the market (CCB and ICBC). I think that $15b is a more realistic size, although $20b is more likely.

My concerns about the ABC IPO are as follows:

2. The bank does not have a strong enough management bench strength. It will have a good team on the IPO led by people who are trusted in the global capital marketplace – led by no less than Pan Gongsheng, who led the ICBC IPO a few years ago. But there is not enough top management personalities in ABC of the calibre as in ICBC and CCB – for areas like risk management, branch banking, technology and so on, where work to strengthen the bank has hardly even started.

3. I met the chairman last year and he gave me the sense that he was trying to second guess what the policy makers want the bank to focus on. At the time of meeting me, he was selling me the idea that the bank was not a rural credit bank in the strict sense, but a bank that focused on the small businesses in the small towns across China (much of it in the agricultural value chain, but not entirely so). Today, the bank’s positioning appears to have changed yet again as it says that it is indeed a rural credit player. It is my view that rural credit is high cost, high risk and not tenable for a bank that wants to raise capital from the global capital markets and still meet national social objectives. This kind of focus is best left in the hands of a policy bank. Yet, it appears that the policy makers are dithering even at this stage as to what to allow the bank to be positioned as in order to give the green light for a global listing.

4. I don’t like the fact that the bank appears to be using a different name in preparation for the IPO. All across China, the Agricultural Bank of China is also known as ABC Bank. A very clear, simple and powerful name. For the IPO, it is using the name Agbank because someone advising the bank thinks that aligning it closer to the more successful banks of Europe with agricultural roots (eg. Credit Agricole) makes sense. Within China, I do not see any campaign by the bank to re-brand itself at the street level. So this mixed messages to foreigners and to locals undermines the brand of the bank and also the integrity of the people positioning the bank for the IPO. It should be called ABC Bank because that is what the power of its franchise really is. This ambivalence in the way it is positioning its name is an indication of other areas where the bank will be flip-flopping during and after the IPO.

5. The groundwork leading to IPO is far less developed than it was when BOC, ICBC and CCB originally went to market. When the first three Big Four banks went to market in the early 2000s, they had: (1) tamed the non-performing loans on their balance sheets (2) started extensive risk management training and processes (3) found strategic partners who gave them a baseline from which to price their IPOs as well as provided much needed technical advice (4) clearly defined their business lines (5) started investing in technology to support all the change (6) scaled down staff strength and branch networks to par down costs.

6. ABC still has not found a really suitable strategic partner – through no real fault of their own because all the major western banks are in troubled waters themselves in today’s market environment. The proposed strategic alliance with Rabobank will be smaller in scope than that which, say, CCB has with Bank of America. The alliance is a tenacious one that came about only after the bank spent most of the past two years looking for other potential partners, including Credit Agricole and CIBC in Canada. Interestingly, I thought that it was the chairman of ABC who put a restriction on himself by seeking cooperations only with international banks with roots in agriculture. His first choice, I recall from my conversation with him, was Credit Agricole.

7. The CBRC appears to be preparing the entire banking industry for possible write downs from policy measures being taken to cool down speculative asset inflation in the marketplace. The capital buffering exercises that the other Big Four banks are undertaking may be designed more the withstand non-performing loans rather than capitalise asset growth. So there should be caution in this.

8. Of course the ABC offering will be fully and properly subscribed, regardless of size, even if the over-subscription rate may be in limbo. But it will be the most expensive banking stock to come to market in recent years and the use of the funds does not give any assurance that the price will hold up post IPO.

The above some top-of-mind thoughts. All said, I am not also saying that the IPO will be a failure or lead to a failure. For IPOs of this size, investors look for governmen guarantees and an opportunity to park large funds in relative safety. I do not see large capital gains following the ABC listing, because the Chinese domestic punters market is also damp at the moment. Happy to hear contrarian ideas though.


  1. ED - additional notes

    I am adding these additional notes as ABC's IPO gains momentum. The bank appears to have been successful in securing interests from about seven global investors.

    My observations on the strategic investors are as follows:
    – Some are the “usual suspects” (Temasek),
    – some are in the fray because of their close relationship with the usual suspects – note Standard Chartered Bank's entry into investing in a large Chinese bank, the increasingly close relationship with Temasek is worth noticing.
    – some are the second class replacement for the more desired investors. I know that ABC wanted Credit Agicole of France to be interested. Rabobank is a lesser alternative.
    – ALL the investors are coming in with a much smaller capital than the players who invested in BOC, ICBC and CCB.

    There is no doubt in my mind that they will pull this IPO off, if the other big four defer their respective rights issues. The China Factor is still there, but only barely.

    From Riyadh, Sunday 20 June 2010.

  2. Hi Ed ,
    any comment with the latest development with DBS ?

  3. Hiya. Also curious about your take on the latest round of management changes at DBS given your strong views in Sept-09 that Rajan Raju must go, and lo and behold, now he has, seemingly without a successor. Agree that DBS' consumer banking performance has been very accident-prone (last month's network crash, horrible financials, Hi notes) but at least some of this is cyclical (no deposit spreads in the current low interest-rate conditions vs. fat spreads back in 2005 – 07 when the unit's earnings last peaked) or else has been a long time brewing (“In fact [DBS] results in 2H2007 tells me they have already been losing market share badly in their home market under Jack and Edmund's watch” – your comment from May-08).

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