Finance, Accounting and Control Case Study

Bank of China’s IPO: Banking on the Banking Reform

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Abstract:
Bank of China launched its domestic initial public offer (IPO) and raised $13.6 billion by selling 14.7% of its stake. Established in 1912, Bank of China was one of China’s four state-owned commercial banks. The bank had come a long way from being ‘technically insolvent’ in 1998 to become one of the biggest banks in Asia. The banking reform of China had helped the bank to reduce its non performing loan (NPL) ratio by 23% within a period of four years, from 27.5% of in 2001 to 4.6% in 2005. Still, some old lending practices, such as focusing on market share rather than profitability and providing loans based on direct orders from the government rather than ability to repay, persisted. As the majority of stake was held by the government, shareholders lacked their accountability. Privatization was required for improvements in bank governance structures, overhaul of their staffs. Besides, China's WTO commitment to open up banking sector to foreign strategic partners by the end of 2006, led the bank offtake its holdings. But the bank was yet to recover from some basic problems. Besides, the huge level of NPL and antiquated computer systems, Bank of China was also struggling to overcome a legacy of fraud and mismanagement. The bank accounted for 75% of the $94 million fraud linked to bank bills and promissory notes. The bank was also financing its long term assets through short term liabilities, thus the liquidity position was at big risk. Still, financial institutions and individual investors rushed for the IPO and oversubscribed by around 80 times

Pedagogical Objectives:

• To understand the role of reform in the growth strategy and revival of banking companies
• To have a brief understanding of the Chinese banking Industry
• To understand how a bank can take advantage of the banking reform
• To understand how IPO’s could take advantage of a booming economy and sectorial reform
• To analyse the possible steps to be taken in order to sustain in the post reform period.

Keywords :  Bank, China, Reform, IPO (initial public offering), NPL (non-performing loan), Loan, Deposit, Interest, Basel, Huijin, Capital adequacy, GDP (gross domestic product), Greenshoe, Province, Finance Case Study, Book value