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Odds favor HSBC application for Shanghai listing
By George Ng (HK Edition)
Updated: 2009-08-20 07:25

HONG KONG: An initial public offering (IPO) in Shanghai by Europe's largest bank, HSBC Holdings Plc, is virtually a done deal now as the bank awaits the regulatory go-ahead for the mainland IPO and the chance to reap huge rewards in Asia.

HSBC will submit its IPO application as soon as the mainland authorities release relevant governing regulations, a spokesman for the bank said. With HSBC having every incentive to push through its Shanghai IPO as soon as possible, the question of any regulatory obstacles looms large in the IPO equation.

Market watchers have generally cited the control of capital accounts and the non-convertibility of the yuan as the key obstacles to foreign firm listings on the mainland.

Odds favor HSBC application for Shanghai listing

However, these regulatory restrictions could be a favorable factor for HSBC, rather than an obstacle, as they have actually raised the odds that the lender will become the first mainland-listed foreign bank.

The authority in Beijing will very likely prioritize HSBC's listing application, because the bank could use the IPO money purely for its expansion on the mainland, avoiding the currency conversion handicap, while other foreign firms with few mainland operations could face the convertibility problem when repatriating IPO cash.

The remaining technical barrier - the difference in financial reporting requirements - is rather readily solvable.

With its publicly-touted intention to move closer to international standards in terms of financial and capital market practices, the country could readily adopt a parallel system regarding financial reporting requirements. That is, issuers in the planned international board of the Shanghai bourse will follow international standards, while domestic issuers will continue to follow domestic requirements, until a unification of the two sets of standards is achieved.

From the overall strategic standpoint, the Shanghai IPO is a key step in the bank's new strategy of focusing more on emerging markets, particularly Asia, after its great setback in the US market.

Freighted with soaring bad debts in the US, HSBC decided in March to halt consumer lending at its US unit, HSBC Finance (formerly known as Household International).

HSBC's 2003 takeover of sub-prime lender Household International contributed most of the $67 billion of bad-debt provisions the bank reported in the past three and half years, more than 13 times the group's pretax profit of $5 billion for the first half of this year.

Asia-focused lender Standard Chartered Bank's (StanChart) enviable interim operating results added pressure on HSBC to gear up its Asian strategy.

StanChart reported a 9.7 percent year-on-year increase in pretax profit to $2.84 billion for the first half despite the financial crisis, thanks to its focus on Asia.

In sharp contrast, HSBC reported a 51 percent drop in pretax profit to the $5 billion gain for the same period, due mainly to a $3.7 billion loss from its North America operations.

"For HSBC, Asia remains a relative economic oasis of opportunity that we have not yet fully tapped," Vincent Cheng, Chairman of HSBC Asia Pacific, told shareholders after the results announcement earlier this month.

As the key engine of growth and largest market in the region, the mainland is undoubtedly in the crosshairs of HSBC's Asian strategy. Economic growth in China remained at a double-digit level over the past decade before the current global economic downturn, while that of developed countries stalled at low single-digit levels.

The mainland is "the largest part of the puzzle" for HSBC's growth and will be an "investment focus" over the next 25 to 50 years, HSBC's Asia-Pacific Chief Executive Sandy Flockhart told media earlier.

A Shanghai IPO is seen as the best available strategy for HSBC to accelerate its growth on the mainland.

"A successful listing in Shanghai will help the group's reputation greatly," said Peter Wong, an Executive Director and General Manager of HSBC Group.

Analysts also think favorably of the lender's likely mainland IPO.

"We believe the branding, advertising and positioning advantages of being one of the first listed foreign banks in China could be significant, given the size and growth prospects of China's banking and consumer financial services market," Goldman Sachs analyst Roy Ramos said in a research note.

An added incentive is that HSBC could gradually transform millions of mainland shareholders into its customers.

A Shanghai IPO is also highly significant in that it will bring billions in Chinese yuan at relatively low cost due to potentially higher valuation, that will be readily used by the bank to expand its yuan-loan portfolio and what is already the biggest network of any foreign bank in the country.

HSBC is seeking to raise between $3 billion and $5 billion from its Shanghai IPO, reports say.

With ever-growing expansion on the mainland, HSBC needs to continuously raise new funds for its mainland operations.

HSBC Bank (China) Co Ltd, the mainland arm of HSBC, is selling up to 2 billion yuan worth of bonds in Hong Kong. The bonds are available for public subscription now and until September 4.

While debt financing is an available option, HSBC also needs to resort to equity financing, as capital adequacy requirements and the optimal capital structure set limits on fundraising by debts.

Chen Jian, deputy commerce minister, said earlier that his ministry would continue to work with other ministries and departments on policies regarding domestic IPOs of foreign firms to "actively guide high-quality foreign firms to go public in China".

So now the only uncertainty regarding HSBC's Shanghai IPO is the exact timing.

(HK Edition 08/20/2009 page4)