The banking landscape in Sichuan Province is set to witness a significant transformation with the impending public listing of Yibin City Commercial Bank (YCCB), making it the third city commercial bank in the region to go public, following Chengdu Bank and Luzhou BankScheduled to debut on the Hong Kong Stock Exchange on January 13, 2025, YCCB’s IPO has already moved into the roadshow phase after passing the exchange’s hearing process.

As of mid-2024, YCCB announced a total asset value just exceeding 100 billion RMB, yet it remains significantly overshadowed by its counterparts in Sichuan’s competitive banking sector, where it ranks lower among twelve city commercial banksSpecifically, its performance indicators reveal that its asset scale is only marginally higher than that of Zigong Bank and Yaan City Commercial BankYCCB reported revenue of approximately 1.078 billion RMB and a net profit attributable to shareholders of around 262 million RMB—placing it at the lower middle tier of its regional competitors.

This situation has led many industry insiders to speculate that YCCB’s primary motive for the IPO may not be rooted heavily in financial necessity, but rather in a strategic maneuver to stave off potential acquisitions.

Five Grains Liquid’s Influence in Banking

Six years ago, Luzhou Bank became the first Sichuan city commercial bank to list on the Hong Kong Stock Exchange

Now, YCCB is poised to follow suit, but its connection to the local spirit industry adds a layer of complexity to its banking operations.

Sichuan Province, renowned for its diverse range of Baijiu (Chinese liquor) producers, has led many local businesses to invest in their local banks, fostering a synergistic relationship through financial services that support their supply chainsThe likes of Luzhou Laojiao and Tuopai Deda have already taken stakes in nearby commercial banks such as Luzhou Bank and Suining Bank respectivelyAt the forefront of this trend is Wuliangye, a leading Baijiu manufacturer in Sichuan, which has invested in both Sichuan Bank and YCCB.

Established as the province's first provincial-level city commercial bank, Sichuan Bank went public on the Shanghai Stock Exchange in 2018, marking a historic first for the regionFrom the inception of Sichuan Bank, Wuliangye has been a central stakeholder, holding approximately 5.5% of shares as of the third quarter of 2024.

However, Wuliangye’s association with YCCB is far more profound

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Since YCCB's founding in 2006, Wuliangye has been its largest shareholderAs one of the bank’s original stakeholders, it has participated in various essential developments, including the bank's restructuring in 2006 and subsequent capital increases between 2009 and 2021.

After nearly twenty years of cooperation leading up to the IPO, Wuliangye has maintained a steady 19.99% stake in YCCB, retaining its status as the dominant single-shareholderPost-IPO, adjustments in shareholdings are expected to reduce Wuliangye's stake to approximately 16.99%, which remains a slight edge above Yibin’s Fiscal Bureau holding 16.988%.

Unveiling of Business Operations

The synergy between YCCB and Wuliangye extends beyond mere investments; it is characterized by robust operational collaborationYCCB has established itself as the go-to financial institution for the Baijiu industry, with a mission to support and foster developments within this vital economic sector.

The establishment of a specialized Baijiu branch in 2015 and a partnership with the Yibin Liquor Association signifies YCCB's commitment to these industries

Now operating two branches dedicated to Baijiu businesses, YCCB has significantly exponentialized its service capabilities to its primary partner Wuliangye and others in the field.

These specialized branches facilitate reliable payment and settlement services crucial for the production and operational needs of Baijiu firmsYCCB has also adopted an "1+N" supply chain financing approach that enables tailored financial products and solutions for partners across the Baijiu production ecosystem.

The figures speak volumes about the bank's reliance on the Baijiu sector, particularly concerning bills of exchangeThe ratio of circulation featuring Wuliangye affiliates in YCCB’s financial operations reveals a heavy dependenceFor instance, the authorized bank drafts issued to Wuliangye and its partners comprised of 63.5%, 65.4%, 48.9%, and 50% of all drafts during 2021 to mid-2024, respectively.

However, in stark contrast, partnerships with the downstream entities for loans and deposits have not fared as well

Data from the same period indicates loans and advances to Wuliangye’s associates represented less than 3% of YCCB’s lending activities over the first three years, rising to only 4.7% by mid-2024; the deposit figures echoed this trend, not exceeding 4% throughout the same time span.

In an intriguing move, YCCB’s IPO draft left out any explicit mention of the robust business dealings with Wuliangye, despite the existence of high-stakes financial relationsAccording to YCCB’s documentation, by mid-2024, their full company deposits (excluding accrued interest) recorded a remarkable total of 39.5 billion RMBHowever, Wuliangye's recent report disclosed a staggering 12.9 billion RMB in deposits with YCCB, accounting for a notable 32.7% of the bank's total company deposits.

The decision not to reveal this significant statistic raises questions about compliance with disclosure regulations in financial reporting, prompting inquiries from various media outlets, though no response has been provided from YCCB as of the writing.

Leadership Instability and Challenges Ahead

The current governance of YCCB is led by Chairman Xue Feng and President Yang Xingwang, amidst a backdrop of frequent leadership changes which may pose challenges to the bank's stability and progression

Over the past decade, the bank has seen an unusually high turnover rate in its leadership roles.

Notably, Xue Feng took over as Chairman in December 2020, following a challenging history of brief tenures from his predecessorsThe original chairman, Zhou Shulin, resigned amid a corruption scandal back in 2008, whereas Hu Min, who succeeded him, enjoyed a lengthy tenure of ten years before leaving in 2018. After a significant vacancy at the chairman role, Huang Qiang took the helm but shortly after handed the responsibilities over to Xue.

Compounding these governance issues is a concerning observation regarding the educational qualifications of the current leadershipYCCB's executive lineup, as outlined in their listing documents, includes Chairman Xue Feng with a doctoral degree in economics from Southwest University of Finance and Economics, while all other executive officers possess significantly lower educational credentials