|18 November, 2019

Chinese state lender sells rural retail risk

Postal Savings focuses more on consumer credit, individual mortgages, plus lending to small businesses, exposing it to higher returns but also higher risk.

A man pushes his bicycle past a branch of China Post's Postal Savings Bank of China in Wuhan, Hubei province May 4, 2012. REUTERS/Stringer

A man pushes his bicycle past a branch of China Post's Postal Savings Bank of China in Wuhan, Hubei province May 4, 2012. REUTERS/Stringer

HONG KONG  - Hong Kong-listed Postal Savings Bank of China, backed by Tencent and Alibaba, is planning a $4.7 bln Shanghai float. The money will replenish core capital, but some proceeds might get absorbed helping rickety rustic brethren too.

The bank, embedded in post offices nationwide, is a financial oddity in some ways. Holding 10 trillion yuan ($1.4 trillion) of assets as of Sept. 30, it is smaller than peers like the Agricultural Bank of China , with 25 trillion yuan. But PSBC has nearly 40,000 branches, nearly twice AgBank’s footprint, and half of them in rural areas. Compared to the “Big Four” centrally controlled lenders, it does relatively little sophisticated corporate finance.

Instead Postal Savings focuses more on consumer credit, individual mortgages, plus lending to small businesses, exposing it to higher returns but also higher risk. It’s right where disruptive fintech companies see the next wave of growth, which explains the big investments from Tencent and Ant Financial, Alibaba’s digital payment and investment arm.

The second listing will bump core tier 1 capital by 60 basis points to more than 10%, Morningstar analysts reckon. That will help buffer rising default risks. Real estate investment, for example, slowed alarmingly in October and economic stress is disproportionately punishing corporate and individual borrowers in inland provinces, making it harder to repay lenders.

Since October two agrarian banks in Liaoning and Henan provinces have already experienced a panicked rush for withdrawals. The risk is that PSBC, in addition to having to worry about its own customers, will be required to join the rescue mission. Media have already widely speculated that bank consolidation – a process already underway – will get an official push next year. If it does, it will likely start with rural institutions.

Even if Postal Savings is able to resist helping out, its share sale will still be overpriced by some measures. Chinese state banks don’t list below book value – otherwise officials can be accused of mismanaging the people’s assets. Postal Savings’ first issue in Hong Kong was at book value, but like most of its peers, the secondary market discounted it almost immediately. With this in mind, this fresh listing will offer a trendy, but pricy, bet on the peasantry.

CONTEXT NEWS

- Hong Kong-listed Postal Savings Bank of China disclosed on Nov. 6 plans to raise 32.7 billion yuan ($4.7 billion) from a Shanghai offering set to be the largest A-share listing in four years.

- The bank plans to offer 5.17 billion shares, or 6% of the enlarged capital, or 5.9 billion shares if demand is strong. China's biggest bank by number of branches set the issue price at 5.50 yuan per share, slightly above its net asset value per share of 5.49 yuan as of June 30. China's CICC and China Post Securities are working on the transaction.

- By end-June, PSBC had a total 39,700 branches, half of which are in rural areas. It had some 9 trillion yuan in savings on book by the end of September, accounting for 96% of the bank's total liabilities.

(Editing by Una Galani and Sharon Lam)

© Reuters News 2019

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