The IPO, raising US$9.7 billion, the world’s largest for some six years, closed heavily oversubscribed and priced at HK$2.95 per share amid a clamour from retail and institutional investors alike.
“This is one deal that investors have to buy,” says a syndicate head in Hong Kong. Perhaps so, but does that apply regardless of price? Bank of China is being valued at 2.2 times book value. That might be justifiable if you buy into the inexorable growth of China’s domestic economy but what if China’s progress hits a bump in the road? And in any event, can the “book” in the equation really be trusted?
Accountants Ernst & Young recently estimated that non-performing loans of China’s four large state-owned banks stood at $358 billion, much higher than official estimates. Chinese authorities pilloried the firm and forced a retraction but there is no smoke without fire. Official guesses, for such they are, treat bank NPLs largely as a matter of history, entertaining the fantasy that no new NPLs are being written by state-owned banks, despite the aggressive addition of new loans to banks’ books over the past few years. When a proportion of these new loans appear on the banks’ books as NPLs, as surely some will, the recalibration of price to book valuations will be an interesting sum to calculate.