Control at Stake as Everbright Bank Preps IPO

(Beijing) - A tough debate over who deserves the controlling stake has apparently been put on ice as China Everbright Bank prepares to become the second Chinese bank to launch an initial public offering this summer.

Everbright is expected to raise some 20 billion yuan through an IPO on the Shanghai A-share market in August, and later float stock on the Hong Kong exchange.

"After the A-share offering is complete, we will immediately begin to prepare for the H-share IPO and strive to make an H-share offering as soon as possible," an Everbright source said.

The China Securities Regulatory Commission (CSRC) received the bank's A-share IPO prospectus for review July 22. It says Everbright plans to offer no more than 6.1 billion shares with an option to float another 900 million shares. Eventually, the bank plans to trade no more than 40.4 billion shares.
 
Details of the proposed H-share offering have not been released.

The bank's fund-raiser has already been delayed for two years and would begin just a few weeks after a dual listing that raised about US$ 20 billion for Agricultural Bank of China (ABC) in Shanghai and Hong Kong.

In addition, according to statements from other state-owned banks, Industrial and Commercial Bank of China hopes to raise about 60 billion yuan, Bank of China is shooting for more than 60 billion yuan, and China Construction Bank is seeking 75 billion yuan from investors on the Shanghai and Hong Kong stock markets by the end of 2010.
 
Amid this scramble for funds, the speed and apparent smoothness of Everbright's IPO project points to the bank's confidence in investor appetite while suggesting that it has, at least temporarily, suspended a tussle between its majority shareholder Central Huijin Investment and former owner Everbright Group.

Central Huijin took over the bank through a debt bailout several years ago. But the original parent Everbright Group, which is now a minority shareholder, wants to regain control.

Paper Trail

CSRC temporarily halted its reviews of all IPO plans, including Everbright's, nearly two years ago after the A-share index, reacting to the then-unfolding global financial crisis, plunged nearly 70 percent in September 2008. The bank had submitted financial documents for a flotation in June that year.

Everbright's initial application with CSRC last year was based on third-quarter 2009 financial statements "in hopes we would able to be successfully listed by the first half" 2010, said the bank's information chief Shen Chunhuan.

But when it became clear that Everbright would have to wait, a new IPO prospectus had to be drafted based on the bank's  2009 annual report. The papers were submitted to CSRC at the end of 2009.

In May, regulatory authorities determined ABC's IPO would be launched in July and be "closely followed by Everbright," a source said.

"Unfortunately, ABC squeezed Everbright out of the listing window," said a member of the IPO underwriting team. "A June listing was impossible."

The bank's financial report point to explosive growth in new lending this year, following a jump in lending in 2009. From January 1-20, for example, new loan volume was highest among all of China's joint-stock banks. And by the end of the first quarter, new borrowing had grown by 42.7 billion yuan, up 6.6 percent year-on-year – the sixth fastest growth rate among joint-stock banks.

Like similar banks in China, Everbright has also experienced rapid growth of total assets, which totaled 1.2 trillion yuan at the end of 2009, up 34 percent, or 349.5 billion yuan, from the beginning of the year.

These financial conditions have put pressure on the bank's core capital adequacy ratio. Despite a private placement of 11.5 billion yuan last year, Everbright's core capital adequacy was only 6.8 percent and its capital adequacy ratio just 10.3 percent at the end of last year.

But since the bank needs a core capital adequacy ratio greater than 7 percent to meet requirements for subordinated debt offerings, according to one analyst, a rapid listing was inevitable.

"For the market, the symbolic significance of Everbright's listing is greater than the substantive pressure," said the analyst.

Battle Lull
 
A signal that its debate with Central Huijin had reached a lull came in May when, according to a source close to CSRC, Everbright Group submitted an application to adjust the shareholding structure. The proposal, which dovetailed with the IPO prospectus, also went to the State Council.

Central Huijin expressed no opinion. "This change in shareholding application was a unilateral move by Everbright Group," a source said.

Since no resolution to the conflict between the group and Huijin appears in sight, and any change will require State Council action, group executives have decided to accept existing conditions and focus entirely on the IPO.

Everbright Group was the controlling shareholder until 2007, when the government approved Everbright Bank's reorganization and Central Huijin injected 20 billion yuan in U.S. dollars, giving it a 70.9 percent stake in the bank.

If not for the injection, the group could have gone bankrupt. "It is not an exaggeration to say Huijin was the only savior for Everbright," a market analyst said.

But even after the injection, the group continued to dominate the bank's board, supervisors, management and organisational relations. And group Chairman Tang Shuangning frequently described an intention "to take over Huijin's stake" in the bank.

Central Huijin currently has a 64 percent stake in the bank, having invested more than 40 billion yuan.

Questioned by Caixin after the group submitted the reorganization proposed, a senior official at Central Huijin refused to say whether it would withdraw as the bank's largest shareholder anytime soon. But several analysts said they do not expect an easy transition.

"Huijin would not withdraw easily," said one analyst. "After all, this involves a relatively large amount."

Everbright Group last year posted total assets of 14.8 billion yuan and negative net assets of 353 million yuan. Net profits for 2009 topped 4.9 billion yuan. Thus, for now it appears the group is in no position to acquire majority control. But that has not stopped it from trying or pursuing the dual IPO.