The Largest IPO in History

You might not have even known that it was happening, but a record of sorts was set overnight. The Industrial and Commercial Bank of China (Hong Kong: 1398) held its long-awaited initial public offering, which, amazingly enough, was the largest one ever, raising a whopping $19 billion.

Just for perspective, the amount that ICBC raised is larger than the market caps of such august banks as Mellon Financial (NYSE: MEL  ) , Regions Financial (NYSE: RF  ) , and the Bank of Ireland (NYSE: IRE  ) . And its $140 billion market cap makes it the fifth largest bank in the world, trailing Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , HSBC (NYSE: HBC  ) , and JPMorgan Chase.

ICBC's shares rose more than 17% in Hong Kong. Significantly, they did not do nearly as well on their opening day in Shanghai. This is one of several reasons why investors need to tread with care with Chinese companies in general, and Chinese banks in particular.

This dual listing is the result of China's capital markets being functionally segregated, despite improvements over the past several years. International investors are forbidden to buy shares in Shanghai or Shenzhen, and Chinese investors cannot buy shares on the Hong Kong Stock Exchange. Because the two markets are segregated in this way, it's impossible to arbitrage out pricing discrepancies between the two: One investor couldn't go long one, short the other, and pocket the difference. Forced separation means that the two have no ability to correlate, even though they're selling identical assets. That Hong Kong's listing rose faster than Shanghai's means that at this moment, Chinese nationals have the ability to buy shares at a discount to the price foreign nationals would pay.

But that's not the real concern here. I think the ICBC offers a pretty compelling opportunity for investors, but that doesn't mean the risk factors in China aren't hair-raising. In spite of receiving a capital infusion of some $15 billion last year, ICBC still lists 4% of its total loan book as "non-performing." By contrast, you'd be hard-pressed to find a U.S. bank with non-performing loans exceeding 2% of book. By the way, by "non-performing," we mean "not making any payments, and unlikely to ever do so." And here's a question: Do you think that the standards in China for declaring a loan non-performing are more or less stringent than they are in other economies? Given China's torrid economic growth, the only logical direction for interest rates to go is up, something that might put even more ICBC loans at risk of default.

None of this is to say that this isn't a stock worth considering for those who can buy shares in Hong Kong. Its tens of thousands of branches throughout China give it a footprint that has no parallel anywhere in the world. But for those who cannot buy overseas, this opportunity is likely to cause a case or two of vertigo before all is said and done.

More international banking Foolishness:

JPMorgan Chase and Bank of America are Income Investor selections.

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