China Construction Bank (CCB) took an important step forward on Thursday in ridding itself of non-performing assets, launching a tender for mortgaged assets worth 4.1 billion yuan (US$493 million) in Beijing.
Fourteen international investors including Citigroup, Goldman Sachs, UBS and Morgan Stanley, and one domestic company took part in the bidding process, a bank spokesman said.
The move is a major part of work by the CCB--one of the nation's "Big Four" state-owned commercial banks--to prepare itself for an initial public offering either later this year or in 2005.
The asset pools consist of 150 mortgaged real estate projects in 18 provinces and municipalities, said a CCB spokesman, without giving any further details.
Ernst & Young, the deal's financial adviser, was unavailable for comment yesterday.
Initial results of the bidding process will be available soon, but more work needs to be done before any actual deals can be struck, according to bank insiders.
CCB asset preservation department head Yang Xiaoyang, who was also unavailable for comment yesterday, said earlier that the bank would also hold two important "auction months" in the spring and autumn to sell more mortgaged assets.
"We have to speed up the disposal of these non-performing assets, because we plan to take a lead in the country by going public," Yang said.
Dong Chen, an analyst at China Securities, said cutting bad loans was the bank's first step towards going public.
Chinese commercial banks would have to step up business supervision and risk control measures in order to become more competitive.
"They would also have to speed up establishment of corporate governance mechanism," he said.
Wang Zhao, a researcher at the State Council's Development Research Center, said China's Big Four will have to sharpen their competitive edge before the end of 2005, when foreign banks will have unfettered market access under China's World Trade Organization commitments.
"The banks will have to lower the ratio of non-performing loans, get rid of historical financial burdens and raise their capital adequacy to international standards," he said.
China's commercial bank law requires the commercial banks' capital adequacy ratio to reach 8 percent, the minimum required by the Basel Capital Accord.
"This goal will have to be achieved before China's commercial banks, especially the Big Four, get listed," he said.
The bank, which was chosen by the central government as a pilot project for conversion into a joint stock bank, won a US$22.5-billion government cash injection in late December.
It also plans to issue subordinate bonds to increase its capital adequacy.
CCB President Zhang Enzhao said the bank would raise its capital adequacy ratio to an "ideal level" before the planned initial public offering.
Zhang said that the bank is now busy talking with foreign investors about a stake sale.
"The introduction of foreign companies as strategic investors is beneficial for increasing capital strength, optimizing our capital structure and diversifying the ownership of our bank," Zhang said.
More importantly, foreign investors could bring advanced management experience and improve the bank's corporate governance, he said.
"Our goal is to establish a modern shareholding commercial bank that will make us a competitive heavyweight in the global financial market," he said.
The bank earned 16.0 billion yuan (US$1.9 billion) in operating profit during the first quarter of this year, a year-on-year increase of 32.4 percent.
Its non-performing loan ratio, by the international standard, was 8.8 percent at the end of March, a drop of 0.35 percentage point compared with the beginning of the year.
(China Daily May 28, 2004)