[PEN-L:28604] GS props up IPO of insolvent Hong Kong bank

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Friday July 26, 6:02 am Eastern Time
Reuters Company News
Underwriters prop up Bank of China HK again on day two
By Alison Leung and Bei Bei She

(Recasts, adds analyst quotes- and updates share price)

HONG KONG, July 26 (Reuters) - Underwriters battled to shore up sagging Bank
of China Hong Kong shares for the second day on Friday following their weak
debut, but institutional investors said the stock was still too expensive
compared to its peers.
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Shares of BOC Hong Kong (Holdings) Ltd (HKSE:2388.HK - News), the holding
company for the territory's second largest bank by assets, fell soon after
the market opened and were weak most of the day but shot 1.85 percent higher
to HK$8.25 after a startling last-minute rally.

Underwriters of its initial public offering posted considerable buy orders
as it dipped to HK$8 in early trade and put in aggressive bids late in the
session, according to stock exchange information.

Goldman Sachs (NYSE:GS - News) was a heavy bidder in the morning while BOC
International, the merchant banking arm of the bank's mainland parent, put
in buy orders at around HK$8.25 late in the session.

Recent heavy declines in global equity markets and investor nervousness
about the bank's high level of bad debts combined to knock the stock down
4.7 percent in its debut on Thursday compared with its initial offer price
of HK$8.50.

The success of the listing and the lessons learned will be crucial to
Beijing. China's big state banks are technically insolvent by western
standards and are being pressed by the government to make major reforms
ahead of their own eventual listings.

Market sources said it was impossible to tell how much the underwriting
banks have spent trying to bolster the deal in the last two days, but some
believe as much as US$375 million may have to be set aside to support the
issue.

"The shares were mostly traded at HK$8.05 today. At the last moment it was
the buyback of the greenshoe that pushed up the price," Eric Lee, head of
sales at J&A Securities.

"That made the stock look better," he said.

Under Hong Kong stock exchange rules, underwriters can buy back up to 15
percent of an offering in its first month of trade to stabilise trading if
the stock drops below the issue price.

The bank was the most actively traded counter on the day with HK$883.45
million (US$113 million) worth of shares changed hands, down from HK$2.9
billion on its trading debut on Thursday.

Despite the late surge on Friday, brokers still expect the stock to hover
around HK$8 in the near term, with selling from jittery retail investors
gradually absorbed by supportive buy orders from underwriters.

"The bank and underwriters are apparently committed to support the stock at
HK$8.00 or above," said Andrew To, sales director and head of research at
Tai Fook Securities.

A lot of the selling pressure is believed to be coming from retail investors
who subscribed for the IPO shares at HK$8.08, a five percent discount to the
price offered to fund managers and investment banks.

MSCI CONSTITUENT

However, To said the expected admission of the bank into MSCI and other
benchmark indices should lend support to the stock in the longer run as fund
managers who use them have to buy the constituent stocks.

"Fund managers and corporate investors who bought Bank of China Hong Kong
shares are unlikely to sell at this level because they will end up with
losses," To said.

Morgan Stanley Capital International announced late on Thursday morning that
Bank of China Hong Kong will be admitted as a constituent stock in its
indices, including MSCI Hong Kong.

Many investors also hope it will be admitted soon to Hong Kong's benchmark
blue chip Hang Seng index, which would bolster demand for the stock even
further. But HSI Services Ltd, which compiles the index, declined to
comment.

A lot of fund managers decided not to subscribe for the initial offering,
saying it was priced too high given recent sharp drops in global equity
markets, Hong Kong's ailing economy and the bank's high proportion of bad
loans.

"We didn't buy it at the IPO, and we don't plan to have any exposure to it
now. In fact all the Hong Kong banks look expensive compared to other global
banks," a fund manager in Hong Kong said.

Based on the bank's close on Thursday, its price to book ratio was about
1.58 times.

Citigroup Inc (NYSE:C - News), the world's largest banking group had a price
to book ratio of 1.91 times on Thursday and Global giant HSBC, Hong Kong's
largest bank, was trading at 2.22 times its book value.

Bank of China Hong Kong's non-performing loans totalled HK$35.51 billion at
the end of 2001 or about 11 percent of its total advances to customers
versus the Hong Kong industry average of 4.09 percent.

It has promised to cut its NPL ratio to 8.4 percent by the end of this year
and to between four and six percent in several years.

But the targets are ambitious given the poor state of Hong Kong's economy.
If it gets weaker, even more loans might go sour.

Investors are also concerned that some of its loans to Chinese firms were
not made for commercial purposes and have little hope of recovery, a problem
plaguing many mainland banks.

"The problem with non-performing loans suggest they still have a problem. So
therefore I am not particularly positive on a sharp rise of returns in the
short term," said Edmund Harriss, a fund manager at Investec Asset
Management.

He also noted the bank's return on equity was low and it had a lot of work
to do to improve it. Its ROE last year was 7.3 percent versus 11.4 percent
for HSBC.

PRECEDENT OF MAINLAND BANKS

Despite its weak first day performance, however, the US$2.8 billion offering
has set a precedent for the future listing of its mainland parent Bank of
China and other major state-owned commercial banks.

Liu Mingkang, chairman of the Hong Kong bank and its parent, said Bank of
China aims to list the whole bank -- the parent and its overseas
affiliates -- on China's stock market within three years, the Asian Wall
Street Journal reported on Friday.

The listing would include the Bank of China, its branches outside the
country and its remaining 75 percent stake in the Hong Kong firm, which is
the bank's most profitable and internationally oriented unit, Liu told the
newspaper in an interview.

Liu said on Thursday that he was confident in the performance of Bank of
China Hong Kong shares in the long run despite fluctuations overseas that
were bound to weigh on Asian markets.