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$1.6 Billion Everbright Securities IPO A Wake Up Call To TARP-Tied U.S. Competitors

A little while ago, in the aftermath of the credit crisis, some were speculating that a spate of financial IPO's might be on the way in the U.S. That phenomenon looks like it's about to kick off in China first, with a $1.6 billion fundraising for Shanghai broker Everbright Securities.

The IPO marks the first sale of a Chinese brokerage since CITIC Securities went public in December 2002, and follows two recent listings, China State Construction Engineering and Sichuan Expressway, which debuted on China's leading exchange with first-day gains of 56 percent and 300 percent, respectively.

The unprecedented boom in IPOs is mainly fueled by China's centrally-planned economy, which has remained more liquid than most as the country's government has both pressured and incentivized banks this year to keep lending, despite declining margins in doing so. For example, Hang Seng Bank, the largest Hong Kong lender by market value, today reported a 29 percent drop in first-half profits from a year earlier. It cited a slump in net interest margin -- the difference between earnings on loans and the cost of making loans -- of 15 percent as one of the primary reasons for the drop.

(Curiously, Hang Seng Bank also announced "poor investment sentiment" as a reason for its decline in profits for the first half of 2009. With gains of 84 percent in the Shanghai Composite Index, and a rise of 38 percent in Hong Kong's Hang Seng Index during the same period, that argument seems a little weak.)

Everbright's whopping ten-figure capital raising is higher than analysts expected during the firm's roadshow, selling at 19 - 21.08 yuan per share vs. a forecast 14.8 - 20 yuan per share. With the funds raised, the broker plans to expand in areas such as M&A, underwriting and widening its overseas presence.

This is exactly the sort of competitive move which will end up overshadowing western banks competing for the same business, which right now are heavily reliant on windfall trading gains to keep pace with quarterly earnings expectations. Even Goldman Sachs, unanimously considered the U.S.'s most successful investment bank, experienced a 15 percent drop year on year in second quarter revenue from investment banking activities.

Backed by a government that's throwing off cash in trade surpluses every quarter, a booming stock market, and a rapidly growing, tightly-controlled economy, Everbright now more than ever has an opportunity to roll out its franchise in the way that Morgan Stanley, Goldman Sachs and JP Morgan did back in 1980's.

"We will use the proceeds ... to fully transform our growth models," Chairman Tang Shuangning said during the IPO roadshow. "We will consolidate and expand our traditional businesses while fully embracing innovation and exploring overseas opportunities."

What's more, Everbright's relatively nimble size makes it especially dangerous. Because it's merely China's tenth largest financial firm -- as opposed to, say, it's second or third largest -- it could do all this without flying over the radar of its TARP-tied competitors.

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