A red-letter IPO

FEW companies are able to go public with a valuation of more than $50 billion less than a decade after their founding. This rarefied group, which mainly consists of tech darlings, is about to admit a surprising new member: a large, lumbering Chinese bank. Postal Savings Bank of China, established in 2007, is on course for an initial public offering (IPO) this year that is expected to be the world’s biggest for nearly two years. Its pitch to prospective investors is also unusual. Far from boasting about how well it is run, it instead emphasises the advantages of scale—which it has so far squandered—to imply that it has vast untapped potential.

Describing Postal Savings Bank as a startup is something of a misnomer. When it launched nine years ago, it was a spin-off from the Chinese postal service, which had doubled as a quasi-bank for 20 years. As a way of bringing finance to rural areas, the government set up windows at post offices for locals to deposit their savings, a model that lots of other countries had previously followed.

In many small villages in China, the postal bank is still the only trustworthy savings institution around. It also provides a remittance network for tens of millions of migrant labourers, letting them send their incomes from far-flung factories back to their families. As of the end of March, Postal Savings Bank had 40,057 outlets nationwide, covering 98.9% of counties, more than any other bank in China. It also had 505m retail customers, more than one in every three citizens.

But it does not do much beyond offering a safe place for customers to put their money. It used to place almost all its assets with the central bank, and so earned a measly profit. The government’s decision to incorporate it as a stand-alone entity in 2007 was the first big step towards improving its performance, opening the door for it to lend more. It still has a long way to go. Last year its return on assets was just 0.51%, less than half the national average for commercial banks of 1.1%. Corporate governance has also been weak. Tao Liming, head of Postal Savings Bank at its launch, was arrested in 2012 for corruption. He died in custody last month.

Some big investors think it can turn itself round. Last year the bank sold a 17% stake to a consortium that includes UBS, a Swiss bank, and Canada’s biggest pension fund. Its listing, which is likely to take place in September, could bring in as much as $10 billion, boosting its depleted capital cushion. It clearly has room to grow. Its loan-to-deposit ratio of 39% is some 30 percentage points lower than its peers’. Low-yielding government bonds still eat up a big share of its assets. It has also yet to take real advantage of its vast client base to sell other financial products, such as insurance.

Yet making the transition to full-fledged commercial bank will be hard. Under-performance tends to be baked into the DNA of postal banks, if privatisations in other countries are anything to judge by. The bank has a responsibility to serve isolated rural communities; it cannot simply cut branches, says Dong Ximiao of the Chongyang Institute for Financial Studies at Renmin University.

Moreover, at the same time as Postal Savings Bank stays yoked to a bricks-and-mortar model, technological change is sweeping through the financial system. Mobile banking is increasingly popular. Payment apps owned by Tencent and Alibaba, two internet giants, already have at least 500m users between them. Most are in cities for now, not in the rural heartland of Postal Savings Bank, but it is only a matter of time before the technology spreads farther.

Optimists think the tech groups will work with the bank, not against it. Tencent and Ant Financial, Alibaba’s payments affiliate, were among the group of investors in Postal Savings Bank last year. Its physical presence could help them build deeper relationships with customers. But a more cynical view is that the tech giants were fulfilling their own political duty, currying favour with the government by supporting a state-owned bank whose business model, though important to China’s rural past, will be less relevant to its urban future.