Bank of China ready to launch the world’s biggest IPO in 6 years
By William Foreman
The Associated Press

HONG KONG—Office worker Carol Au scurried out of the Bank of China’s dazzling skyscraper in central Hong Kong with a subscription form to buy shares in the lender’s $9.9-billion initial public offering—slated to be the world’s biggest IPO in six years.
       The 28-year-old was like hundreds of thousands of other Hong Kongers who flocked to bank branches during the past week to pick up forms for the June 1 listing on Hong Kong’s stock market. They’re ready to bet that the No. 2 bank in China’s booming economy will be a great investment.
       But Au was also aware of the risk of investing in a bank with a history of bad loans and corruption. The bank’s former chairman and president Wang Xuebing is serving a 12-year prison term for taking bribes.
       “I’ll just be buying a little bit at first so it’s not too risky,” Au said as she rushed off to work clutching the bank’s prospectus, as thick as a big city’s telephone book.
       One of the factors feeding the frenzy for Bank of China is the remarkable success two other big Chinese lenders that had IPOs in Hong Kong last year.
       The share price for China Construction Bank, the nation’s No. 4 lender, has shot up 50 percent since its IPO in late October. Bank of Communications, the fifth-largest, has nearly doubled since it hit the market in June.
       Agnes Deng, investment director at Standard Life Investments in Hong Kong, said the banks look like a good long-term investment.
       “Bank of China will benefit from financial reform in China and will benefit from the consumer loan growth as well as benefit from a lot of the foreign investment coming into China,” she said.
       Launching IPOs for state-owned banks in overseas capital markets is key to China’s plan to clean up its financial system. For decades, the big banks have been plagued with poor governance, graft and bad loans to clunky state-owned enterprises that squandered the money as they asked for more.
       Bank of China had one of the worst records. To prepare the lender for its IPO, the government pumped $22.5 billion into the bank to clean up bad loans. The bailout reduced the bank’s nonperforming-loan ratio to 4.4 percent in mid-2005, from a whopping 33.41 percent in 2003, Fitch Ratings said.
       At a recent news conference that served as a big pitch for the IPO, the bank’s leaders briefly acknowledged that the institution has had troubles. But they said the bank’s history, mammoth size and reform efforts gave it the brightest future.
       “Bank of China has gone through a lot in the past few years. I would just describe our current IPO process as being at the right place at the right time,” chairman Xiao Gang said at a video conference in which his image was projected on a huge white map of the world.
       The bank is China’s oldest, founded in 1912 shortly after the fall of the last dynasty, the Qing. The bank’s Hong Kong skyscraper—designed by world-renowned architect I.M. Pei, whose father worked for the bank—is one of the world’s most stunning buildings, with its diagonal cross braces, triangular shapes and glass roofs.
       The building’s modern design jibes with the cutting-edge image the bank’s leadership is trying to sell to potential investors.
       Li Lihui, the bank’s chief executive officer, told reporters in Hong Kong that the lender was the leader in many of the fastest-growing businesses—like auto loans, which the bank is No. 1 with 32 percent of the market among the four biggest banks.
       “Over the past two years, we accounted for approximately one-third of the new mortgage loans. We were the first and are the largest credit-card issuer with a market share of 24 percent,” Li said.
       And he said there’s plenty of room to grow as the world’s most populous nation grows more affluent. He noted that there are only two credit cards per 100 Chinese, while in America there are 200 cards per 100 people.
       “Bank of China is at the center of this personal banking boom,” Li added.
       But the bank will have some serious competition by the end of this year when China opens up its banking sector to foreign lenders, like HSBC Holdings Plc. and Citigroup Inc. China agreed to eventually let in overseas banks when it joined the World Trade Organization in 2001.
       Amid the hoopla of Bank of China’s IPO, there are those who point out that serious risks are still lurking. A report by Lehman Brothers recently questioned whether the bad loan problem has been fixed.
       The report by Rob Subbaraman and Wenzhong Fan said that government bailouts, IPOs and restructuring don’t necessarily improve management and lending behavior.
       Lehman Brothers also noted that China hopes that foreign investors will bring much-needed management expertise to the banks. But it’s still unknown if the lenders will listen amid the “recent rise of nationalist sentiment about foreign stakes,” the report said.
       But these concerns probably won’t scare off many investors, said Howard Gorges, vice chairman of South China Brokerage.
       “People are not expecting to buy perfection, as long as they feel there’s an improving trend underway, given the size of the Chinese economy and the scope of Bank of China within that. They’re buying a piece of China,” Gorges said.
       The IPO on June 1 plans to raise $9.9 billion—and eventually hit $11.4 billion with the greenshoe, or an extra 15 percent of shares that could be sold a few weeks after the IPO prices. That would make the listing the world’s largest since a $10.6-billion IPO by AT&T Wireless Services Inc. on April 26, 2000.