The IPO of Agricultural Bank of China (ABC) (A)

Banking in China• People’s Bank of China functioned as both China’s Central Bank and its

Primary Commercial Bank till 1970s• By early 1980s, the PBOC’s commercial activities were outsourced to 4

primary state-owned banks popularly called “THE BIG FOUR”• In 1990s Big Four dominated the banking system and controlled 90% of total

assets• Since China’s entry in WTO in 2001 saw a growth in domestic private banks

increasing competition in China’s banking sector• Foreign banks were allowed to extend lending in local currency• Focused too much on giving loans to state owned sector of economy and not

private companies

Non-Performing Loans• NPL is a sum of borrowed money upon which the debtor has not made his or

her scheduled payments for at least 90 days• In 2002, the PBOC estimated the NPL to total loans of the big four banks to be

between 21.4% and 26.1%• The accumulation of NPL in the largest banks put the banking system in

danger of a possible banking crisis• In 1998, the Chinese Government started the process of bank restructuring

Bank Restructuring

The PBOC lowered the reserve requirements for banks and allowed them to purchase bonds from Ministry of Finance

The Ministry of Finance used this cash to inject capital into “The Big Four”

Asset Management Companies were created by government to takeover the NPAs from the banks

Agricultural Bank of China• One of the “Big Four” banks in the People’s Republic of China• Founded in 1979, headquartered in Dongcheng District, Beijing• ABC had a network of 23,624 branches which was one of the largest

domestic distribution network• Among the Big Four, ABC was a third largest bank in terms of total assets

and deposits

The ABC Banking Model• ABC’s primary business segments consisted of corporate banking,

retail banking and treasury operations• It obtained more than half of the operating income from the

corporate loans

ABC Banking Model

Corporate Banking

• Included state owned enterprises, foreign invested enterprises and government agencies

• ABCs loans were concentrated in manufacturing sector (approx. 30%)

• In 2009, domestic corporate loans comprised 71.7% of total loans

Retail Banking

• Approx. 320 million retail banking customers, of which 8.24 million were retail loan customers

• Retail loan portfolio comprised 19.1% of total loans

• Business card business experienced significant growth with a total of 365 million cards issued till 2009

Treasury Operations

• Consisted primarily of money market activities, investment and trading activities and gold trading

• It comprises 11.7% of total operating income

Initial Public Offering• An Initial Public Offering (IPO) takes place when a publicly listed

company floats its shares on a stock exchange market for the very first time

• ABC was the last of the Big Four to organize the IPO• In 2010 the IPO team of ABC was planning to launch would

probably be the biggest IPO in history• The IPO team was to organize simultaneous listing in stock

exchange of Shanghai and Hong Kong

The Restructuring of ABC• With a view to prepare it for public offering the Chinese government in 2008

approved the plan for restructuring of ABC• The bank off-loaded NPL and impaired assets equivalent to 24% of its portfolio

or $117.4 billion

Problems faced while going public• Volatile market in 2010 hints toward double dip recession in US• To maintain low level NPL ratio after the IPO• Investors perceived ABC as making policy loans• Negative reviews by Bank of American-Merril Lynch

Merrill Lynch report• The analysts saw rural banking as the major concern• Analysts wondered whether the government itself would let ABC operate

as a commercial bank and questioned the policy risks of rural banking• Other areas of concern included the centralization of credit approval

decisions and lack of credit culture as some rural borrowers view bank loans as “fiscal aids”

What now?• In spite of these hurdles, ABC should go for a road show and

issue the IPO without delay. The main reasons for this are as follows:

As ABC is China’s third largest lender it would create a sense of security in the investors causing them to invest more money and feeling more certain about profits.

If they delay the IPO they may face competition from other Chinese banks who were also planning to go public.

Any further delay would result in change of IPO prospectus and include audited results for first half of 2010.

Thank YouGroup 4 – Section B