2596.HK
Yibin Bank's completes IPO

The Sichuan-based bank raised HK$1.8 billion in gross proceeds in a Hong Kong IPO to replenish its capital base

Key Takeaways:

  • Yibin Bank raised fresh funds in a Hong Kong IPO after slower growth in its profits relative to its loan growth eroded its capital buffer
  • The regional lender’s revenue growth stalled in the first half of last year amid weak credit demand and falling interest rates

  

By Warren Yang

Yibin City Commercial Bank Co. Ltd. (2596.HK) was a relative rarity when it landed on the Hong Kong Stock Exchange this week — becoming the first regional bank to list in the market’s recent wave of IPOs, and providing a fresh glimpse into the challenges facing Chinese lenders these days.

Last Friday, the bank raised about HK$1.8 billion ($231 million) in gross proceeds in a Hong Kong IPO after pricing its shares at HK$2.59, the bottom end of its indicative range, suggesting underwhelming investor demand. Indeed, just over one-fifth of the shares earmarked for retail investors in Hong Kong were picked up, according to Yinbin’s announcement on the sale.

Yibin Bank shares edged up 0.7% in their Monday trading debut and traded roughly flat the next day. While hardly exhilarating for investors, the debut was far more stable than the one for recreational vehicle (RV) maker New Gonow (0805.HK), whose shares tanked by 23% on their debut that came the same day as Yibin’s.

Yibin Bank turned to the equity market to raise funds after profit growth that lagged its pace of loan portfolio expansion eroded its capital buffer. Regulators require banks to maintain their capital above certain levels to lower the risk of failures. Yibin Bank’s capital-to-assets ratio has slipped in the past few years as its assets, more than half of which are loans, have expanded faster than its capital, although the ratio remains above the regulatory minimum, according to its IPO prospectus.

In theory, the government of Yibin, a city in Southwest China’s Sichuan province, could have also recapitalized the lender to avoid the dilution of its ownership that occurred with the sale of shares to outside investors in the IPO. But that may not be so feasible right now as money is tight for local governments, whose fiscal revenue is dwindling, largely because of a drop in land sales amid a prolonged property slump. Such governments are also sitting on huge amounts of debt that they’re struggling to repay.  

Previous share sales

Yibin Bank has previously boosted its capital base by privately selling shares to other institutions tied to the local government. One of the biggest of those is well-known liquor maker Sichuan Yibin Wuliangye Group, which is now the lender’s top shareholder with about 20% of its equity prior to its IPO after multiple capital injections.

But Yibin Bank can ask its existing shareholders for more money only so many times, so the IPO was a critical new funding source for the company. Although Yibin Bank shares didn’t exactly fly off the shelf in its IPO, it still was able to raise a significant sum of fresh capital that amounts to about 18% of its shareholder equity as of the end of last June. And now that the bank is listed, it can issue and sell new shares to raise fresh funds more easily down the road if necessary.

Yet the bank’s ability to attract significant investor interest as a publicly traded company is highly uncertain as its financials aren’t exactly stellar.

Yibin Bank’s operating income totaled 1 billion yuan ($136 million) in the first half of 2024, virtually unchanged from a year earlier. Its net interest income, the bank’s primary revenue source, actually decreased 4%, but that was offset by growth in its fee income. The bank managed to increase its net profit by about 3% to 261.8 million yuan, thanks largely to a decrease in expected credit losses.

Such slow profit growth for a lender that is a key regional economic funding engine underscores the many challenges Chinese banks are facing. For starters, Yibin Bank’s total gross loans increased a modest 6.6% as of the end of last June from a year earlier, indicating sluggish credit demand despite China’s ongoing monetary easing to reinvigorate its economic growth. At the same time, the central bank’s rate cuts are putting pressure on all banks’ margins. In the first half of 2024, Yibin Bank’s net interest margin dropped to 1.86%, the lowest since at least 2021, the earliest disclosure year in its prospectus.

Bad loan risks

Timely collection of interest on its loans may not always be easy in the current climate either, as some borrowers may be facing their own credit problems. At first glance, Yibin Bank appears to be doing pretty well in this area. Its non-performing loan (NPL) ratio trended down to 1.72% at the end of last June from 2.27% at the end of 2021.

But in 2020, the bank cleaned up its balance sheet by selling NPLs to its top shareholders, including Wuliangye Group. A potentially troubling sign comes from Yibin Bank’s “doubtful” loans, for which full repayment is unlikely. Loans with that classification more than doubled in the first half of last year, while “special mention” loans, another class of shaky loans, increased more than 30%.

This means that underlying credit risks for Yibin Bank’s customers likely remain high, despite the declines in its headline NPL figures. So, it’s not surprising that the bank is keeping a significant amount of money in reserve for loan-loss provisions. At the end of last June, such allowances amounted to 5.35% of its total gross loans, which was down a bit from 5.58% six months earlier but is significantly higher than 4.36% at the end of 2022.

Yibin Bank certainly isn’t alone in dealing with such problems. Among other regional banks, Jiangxi Bank (1916.HK) posted a 47% year-on-year drop in its net profit in the first half of last year as its asset impairment losses swelled more than 50%. China Bohai Bank (9668.HK) also saw its profit fall 9.8% year-on-year in the first half of last year.

Yibin Bank’s current valuation multiples don’t look so bad, at a price-to-earnings (P/E) ratio of 22 and a price-to-sale (P/S) ratio of 5.4. Jiangxi Bank’s P/E ratio is 65, but that’s a function of its net profit being so low relative to its dismal share price. More telling is its P/S ratio of just 0.3. Bohai Bank’s ratios look depressed both in terms of P/E and P/S, with the former at slightly less than 4, and the latter just 0.6.

Thus, Yibin Bank looks more strongly valued than its peers right now. But unless it can somehow differentiate itself from other regional lenders with more promising financial results, it may only be a matter of time before its stock retreats closer to where its peers are — a prospect that hardly looks good for potential buyers of its shares.

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