In October 2006, the Industrial and Commercial Bank of China (ICBC), China’s biggest bank had a historic dual listing on two stock exchanges, the domestic portion of the stock shares on Shanghai stock exchange (A Shares) and shares on Hong Kong stock exchange (H shares), which was mainly for the global investors. Due to the massive oversubscription of IPO, ICBC was able to exercise the greenshoe, or over-allotment option, which enabled it to sell up to 14. 95 billion.
ICBC decided to issue equity shares to foreign investors to make this mega IPO a huge success, to the tune of over $430 billion dollars, “almost twice the value of Citicorp, the world’s largest bank” (Hill, 2011). It was the only way to improve its capital strength, capital adequacy, profitability and sustainability. Since it has presence in 13 countries and regions globally, the foreign investments can reduce the entry barriers in various countries. The foreign investment was necessary to improve the bank’s balance sheets, risk management and modernize the bank’s various systems to withstand competition.
Therefore, Merill Lynch, China International Capital Corporation (CICC) and ICEA Capital were made joint global coordinators for the sale and Credit Suisse and Deutsche Bank were joint book runners to boost up the foreign investment. ICBC wanted the investors with a long term perspective; therefore it was looking for foreign investors. This proved advantageous for ICBC as the IPO was oversubscribed and was a huge success. It helped it to wipe out a billion of dollars of bad debts, which, in turn helped ICBC in its growth and development.
There was no down side of this decision (ICBC biggest IPO, 2006). The main attraction of the ICBC listing for foreign investors was the growing and profitable prospects of ICBC, as it is a state owned bank expanding itself in the U. S. , European nations like Paris, Brussels and Asian countries like Indonesia and Thailand. Due to the mega-huge size of the IPO, large asset scale and revenue base of the bank, the IPO price was expected to be 2 to 2. 6 times the lender’s book value. It could bring a large amount of premium to the investors.
Since there was a major foreign investment in ICBC in February 2006, when Goldman Sachs, American Express and Allianz Group bought US$3. 78 billion stake in it for assisting it in continuing development by utilizing their distinctive capabilities. This was done through issuance of new ordinary share in ICBC. This was a favorable event for encouraging other foreign investors to invest in it. At that time, the Chinese economy was growing at a very fast pace and was having a GDP growth rate of 10% and after witnessing the growth story of China during SARs crisis in 2003, there was no better place than China to invest.
This attracted foreign investors as it could help them to make easy money. Due to the favorable prospects of the bank, the investors could expect the dividend yields or other benefits also which they got in 2009 when ICBI offered a right issue of 1. 1 billion A shares and 3 billion H shares. The risks associated with the foreign investment are that the bank has long track record of bad debts, lending scandals and facing tough competition in the industry which could affect the profitability (Yan & Lijun, 2010).