Friday, May 19, 2006

BMO Looks to Leverage China IPO Win

The Globe and Mail, Sinclair Stewart, 19 May 2006

Bank of Montreal, flush with the success of landing a piece of China's largest initial public offering so far, is opening an investment banking office in Beijing next month to compete for more underwriting assignments.

Last Friday, BMO learned it was one of six global firms awarded a mandate to lead a $10-billion (U.S.) IPO for Bank of China, the country's second-biggest financial institution. BMO is the only Canadian investment bank participating in the IPO, although sources confirmed that it was not the only domestic bank that pitched for an underwriting assignment.

And with good reason. The fees on the deal are expected to reach $250-million, and will be largely divvied up by Goldman Sachs and UBS AG, which are leading the offering. Even so, a smaller slice is expected to be very lucrative for BMO, which has been building up goodwill in China for decades now, and has developed deep relationships with both government and banking officials.

Now that it has been stamped with the imprimatur of the Bank of China, BMO is hoping to parlay its IPO assignment into new business from other Chinese companies looking to test the public markets.

"Once you have this kind of assignment from a prestigious institution like Bank of China, there's no question in our minds that it's a very strong signal that we are recognized as a firm that can deliver globally and can help Chinese institutions," said Yvan Bourdeau, chief executive officer of investment banking arm BMO Nesbitt Burns Inc. "I would think when additional IPOs are coming to the market, when we make our pitch to them we will certainly stress to what extent we were involved with this transaction."

The real question, though, is how investors will fare. Two other Chinese state-owned banks, China Construction Bank Corp. and Bank of Communications Ltd., have gone public recently and both have enjoyed considerable success. Shares of China Construction, the industry's No. 3 player, are up approximately 50 per cent since the company filed a $9.2-billion IPO last year. Industrial and Commercial Bank of China, meanwhile, the No. 1 bank, is expected to unveil a $12-billion offering this fall.

The fascination with Chinese bank stocks is driven by the assumption that they present a simple way to cash in on the country's thriving economy. Yet the banking industry remains dogged by questions surrounding its financial health and transparency.

For decades, Chinese banks were viewed as lumbering, inefficient cash registers for the government, and their heavy lending to state-run enterprises left them with a crushing burden of bad loans.

The Chinese government has injected tens of billions of dollars into its major banks to help fix their balance sheets and prepare them for competition with their Western counterparts. It has also eased ownership restrictions and allowed foreign entrants to take minority ownership stakes in Chinese banks.

The government says the underperforming loans have been whittled down to $137-billion, a figure some critics argue is too low.

Mr. Bourdeau conceded that these banks are still working through their loan book issues, but said he is confident the country has put in place the right programs to address the problem. In addition to government aid, he said the banks are benefiting from a new generation of managers, many of whom did their formal training in the United States and other Western countries.

BMO will be selling its portion of the Bank of China IPO to Canadian investors, most of which will be institutional. Mr. Bourdeau noted that Canada has a large Chinese population that is familiar with the bank, and said this could provide a retail opportunity for BMO.

Its fledgling investment banking operation will have a staff of three people who will look for financing or underwriting opportunities with Chinese companies. When they compete for business, the bank will fly in a group of international bankers to meet with clients and assist with the pitch.

BMO already has a wealth management operation in China through its minority stake in Fullgoal Fund Management Co., and was the first Canadian bank to be granted a licence to accept deposits in local currency at one of its Chinese branches. It expects to receive a second licence by the end of 2006.