IPOs: China Postal Bank Shines on Conservative Position

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Bottom line: China Postal Bank’s signing of several major global institutions as cornerstone investors reflects the attractiveness of conservative financial service firms as China’s economy slows.

Conservative Postal Bank draws big global investors

What’s likely to be this year’s biggest IPO has just moved one step closer to market, with word that Postal Savings Bank of China is near a deal to sell about 15 percent of itself to a group of mostly foreign investors ahead of a planned $20 billion new offering. This particular IPO will provide one of the most conservative choices yet to investors looking to buy into China’s financial services market.

That’s because Postal Bank historically served as a place for consumers to park their savings, and did little actual lending like traditional banks. That difference appears to be a major factor making Postal Bank so attractive now compared with more traditional lenders like ICBC (HKEx: 1398; Shanghai: 601398), which are standing on the cusp of a bad loan crisis as China’s economy rapidly slows.

I’m not typically very interested in this kind of company, which in many ways looks more like a power utility or very conservative insurance company that offers growth that’s steady but otherwise not very inspiring. But in the current environment such a conservative position may be desirable, which is drawing names like Swiss banking giant UBS and Singaporean sovereign wealth fund Temasek as cornerstone investors for China Postal Bank.

According to the latest reports, UBS has become the largest of those cornerstone investors by putting up $2 billion into the IPO pre-sale. (English article) Apart from Temasek, others in the $8 billion pre-IPO funding round include JPMorgan, and International Finance Corp (IFC), a unit of the World Bank. You know that when the World Bank is investing in something that it’s probably a fairly conservative bet!

This kind of cornerstone investing has become quite popular among major state-run Chinese companies, and often sees them pre-sell big portions of themselves to major institutional investors in the run-up to their massive IPOs. Such investments become an informal endorsement that often helps to attract smaller investors to the actual IPO.

Year’s Biggest Offering

Many lesser-quality companies often have to turn to Chinese state-run investors to buy into their pre-sales, so the fact that Postal Bank could attract so many big global names is obviously a positive sign for the company. The bank is ultimately aiming to raise $20 billion in its IPO, which would easily make it this year’s biggest, approaching last year’s record $25 billion IPO for Chinese e-commerce giant Alibaba (NYSE: BABA). Word of the offering first emerged early this year, with reports saying the bank was hoping to raise up to $25 billion. (previous post)

Postal Bank is clearly a consumer-focused financial organization, with a whopping client base of more than 500 million. I often see many of those clients when I occasionally go to my local post office, and can say with confidence that many are smaller mom-and-pop retirees who are among the most conservative people in China with their money. So it’s no surprise that many of them pick an equally conservative option like Postal Bank to park their hard-earned savings.

There’s no word in the reports on what exactly Postal Bank does with most of its deposits, though a big portion of those probably go into ultra-conservative investments like sovereign bonds from countries like China and the US. It’s a bit unclear why this kind of company would need $20 billion from an IPO. But we got a glimpse of a more aggressive strategy that could be coming, when reports emerged earlier this year that Postal Bank was among a group of state-run giants investing in Ant Financial, the financial services affiliate of Alibaba. (previous post)

Regardless of what it does, this particular bank will always look like a safer bet than big lenders like ICBC and China Construction Bank (HKEx: 939; Shanghai: 601939), and is probably also less risky than bad-asset management specialists like Cinda (HKEx: 1359). In the current climate that positioning looks quite attractive, and I expect this particular IPO should price strongly and the stock should probably do well for at least its first year.

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