July 8, 2011 5:20 AM EDT
Chinese financials face mounting pressure in the coming weeks as lock-up periods on an estimated $35 billion worth of stock expire, potentially unleashing a flood of shares into a market wary of swelling bad debts and slowing growth.
The success of such large block sales from cornerstone investors will hinge largely on timing of the sale, especially given the volume of stock coming out of expiry from just one sector.
Among the big block of shares that could potentially hit the market include $6 billion worth of Agricultural Bank of China, about $7.7 billion of insurer AIA Group Ltd and some $2.6 billion in China Pacific Insurance Group Ltd from Carlyle Group CYL.UL.
"It will be a hard sell given the negative sentiment for Chinese bank stocks," said Mike Werner, an analyst with Sanford Bernstein.
The sales overhang are putting further pressure on financial stocks which have already been underperforming the broader market this year, partly on concerns of slowing loan growth and mounting worries about bad debts.
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The Hang Seng Composite Index of 13 financial companies is down 5 percent on the year, underperforming 1.1 percent fall in the broader market , pushing valuations close to the troughs last seen during the financial crisis of 2008.
On average, Chinese bank shares have underperformed 8.5 percent their peers in the four weeks leading up to the lock-up expiry, according to Werner's calculations.
STAY OR GO?
For cornerstone investors, the dilemma is whether to take some money off the table or hang in there to see if the underperforming bank stocks will rebound. Inevitably, a potential hangover will keep the pressure on stocks.
Cornerstone investors commit to investing in an initial public offering before its price determined but they get firm allotment and in exchange they agree to a lockup - usually six to 12 months. The dominance of mutual funds in the U.S. and European IPO markets precludes the need for cornerstones there, so this kind of early investor is unique to Asia.
Singapore state investor Temasek Holdings TEM.UL this week underscored the importance of moving quick and first by selling $3.6 billion of shares in China Construction Bank (CCB) and Bank of China, outmaneuvering other large investors in the process.
Its move may have stymied plans by Bank of America Corp (BAC.N), which is widely expected to sell at least part of its $22 billion holding in CCB and might have been looking at the Singapore state fund as a possible buyer of the stake.
BofA's lock-up in CCB shares expire in August end, while some cornerstone investors in AgBank will be free to sell their holdings on July 15. A BofA spokeswoman declined to comment on its shareholding in CCB.
Other foreign banks have sold their IPO and pre-IPO stakes in Chinese lenders over the past two-and-half years. Goldman Sachs has partly exited from Industrial and Commercial Bank of China, while UBS and Royal Bank of Scotland sold their holdings in Bank of China.
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