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ABC’s problems keep it far behind the competition |
China’s cabinet has approved a capital injection into ailing state lender Agricultural Bank of China, priming it for an initial public offering in late 2009 or 2010. In addition, $150 billion to $200 billion of failed loans will be sucked out of ABC, which was set up in 1979 to provide financing to China’s 800 million farmers, and stored in one or several of the country’s leading asset management companies.
In a year full of record bail-outs, the capital injection will be provided by Central Huijin, a division of China Investment Corporation (CIC), Beijing’s sovereign wealth fund, ABC vice-president Pan Gongsheng told a press conference on October 22. Set up in 2005 to oversee the bail-out of other leading Chinese banks, Central Huijin will take a 50% stake in ABC, with the remainder to be held by the country’s finance ministry. The bank will also seek further capital – as well as much-needed management and risk-control expertise – from one or more foreign lenders, who will buy a strategic stake in the lender before its IPO.
Given the way that the global financial map has shifted in the past few months, those strategic investors are as likely to come from the Middle East or Japan as from north America or Europe. There remains the tantalizing yet remote possibility that one of China’s leading listed state lenders – Industrial and Commercial Bank of China (ICBC), Construction Bank (CCB) or Bank of China (BOC) – could yet take a minority stake in ABC, helping the lender through the difficult transition process between private and public life.
In what has become standard procedure for restructuring state banks before selling shares to investors, the government is expected to complete the transformation of ABC by mid-2009, Pan says. That will pave the way for an initial stock sale likely to be hosted by the Hong Kong and Shanghai exchanges – although with ABC’s legacy of dud loans, China’s ruling Communist Party might choose only Shanghai.
"Agricultural Bank is still quite far behind its competitors – they have problems that the other big [Chinese state] banks have never had," says Bill Stacey, a banking analyst and chairman at Lion Rock Institute, a Hong Kong-based free market think-tank.
ABC has long been the lame duck in China’s financial system, sometimes referred to as the bank the country would like to forget. By dint of its history as a lender to China’s army of farmers, it remains the country’s third-largest lender by assets – Rmb6 trillion ($880 billion) at end-2007 – operating 24,000 branches nationwide and employing 500,000 staff. In contrast ICBC, the country’s largest lender, employs 351,000 people and has cut its branch network to 16,400 from nearly 30,000 over the past five years.
ABC is also saddled with a legacy of state-enforced lending to rural workers and cooperatives that are mostly unable to repay loans. According to the bank’s annual report, failed loans stood at 23.5% of its overall loan book at the end of 2007, or roughly five times the national average. ABC’s Pan hopes to cut that rate to about 4.1% after hiving off all of the bank’s wholly failed loans.
Beijing’s central hierarchy has moved in recent months to invigorate ABC’s historically moribund management structure. Earlier this year, Pan – a man referred to as ‘Mighty mouse’ by some China analysts because of his diminutive stature and tendency toward bullish rhetoric – was transferred to the agricultural lender from ICBC, where he was in charge of mergers and acquisitions and played a key role in ensuring the success of the bank’s $21.9 billion 2006 IPO. Other executives are expected to join ABC over the coming year as it struggles to get its finances in order. Ratings agency Standard & Poor’s estimated in 2007 that ABC was saddled with about $200 billion in dud loans.
China has spent $500 billion bailing out its troubled banks over the past decade. About $22.5 billion was pumped into each of CCB and BOC in 2004, with ICBC being treated to a $15 billion injection a year later. The remainder has come largely via the transfer of failed loans into the country’s four leading AMCs: Orient, Huarong, Great Wall and Cinda.