SHANGHAI (Dow Jones)--China's securities regulator on Wednesday approved Agricultural Bank of China Ltd.'s application for its planned US$20 billion-US$30 billion initial public offering in Hong Kong and Shanghai, removing the last hurdle for what could be the world's largest-ever share float.
The decision by the China Securities Regulatory Commission also ended a brief bout of speculation over a possible delay in the IPO given signs of lukewarm interest and concerns over AgBank's likely high valuation and less attractive business fundamentals compared with its local peers.
AgBank, the last of China's Big Four state-run banks to float shares on the stock market, said in a preliminary prospectus Friday it will sell up to 54.8 billion new shares, or 17% of its enlarged capital base, in Shanghai and Hong Kong, if over-allotment options are exercised in the two cities.
China's third-biggest lender by assets said it will allocate 53% of the offering, or 29.2 billion shares, in Hong Kong and 47% of the offering, or 25.6 billion shares, in Shanghai.
The Hong Kong stock exchange will review the Hong Kong part of the bank's dual listing Thursday, people familiar with the deal said earlier. If the deal is approved, the bank plans to list in Shanghai July 15 and the following day in Hong Kong, they added.
AgBank, more than 96%-owned by China's sovereign-wealth fund and the Ministry of Finance, has been trying to change its business model following years of government-directed lending to farmers and agriculture-related businesses, often in poor areas.
While the bank plans to raise at least US$20 billion in its IPO, analysts said weak demand may cap the fundraising at around $18 billion, below the record $22 billion raised by Industrial & Commercial Bank of China Ltd.'s IPO in 2006.
There are signs that investors aren't as enthusiastic about AgBank's IPO as previously thought due to concerns about the bank's likely expensive valuations, and an outlook of weaker profitability and higher nonperforming loans than at China's other large banks because of the lender's agriculture-related business.
"The biggest problem for the bank still lies in its asset quality. The quality of the new loans it has issued since 2004 remains worrisome," said Hu Yuanchuan, an analyst at Industrial Securities.
In 2009, agriculture-related business accounted for 36% of the bank's total assets, AgBank said in its prospectus, without disclosing the contribution to net profit.
The nonperforming loan ratio for its agriculture-related operations stood at 3.69% at the end of 2009, while its total nonperforming loan ratio was 2.91%. The other lenders among China's Big Four--ICBC, China Construction Bank Corp. and Bank of China Ltd.--each had a nonperforming loan ratio of around 1.5% last year.
If AgBank prices its Shanghai IPO at CNY2.50-CNY2.90 per share, as some analysts expect, it would generate a diluted price-to-book ratio of 1.5-1.6 times, in line with that of its major state peers, Hu said.
Given AgBank's weaker fundamentals, "we don't think such pricing would be hugely attractive," he said.
