Monday, November 19, 2007

Chinese Banks Hit the Acquisition Trail

As financial institutions in the developed world become ever more mired in the credit crisis, China's bankers are scouring the world for acquisition targets.

Flush with cash from some of the world's largest public share sales and with the explicit backing of the ruling Communist party in Beijing, the banks are looking abroad to diversify out of the highly competitive Chinese market and to buy foreign expertise that can improve their still-basic management structures.

The situation is a far cry from that prevailing two years ago when foreign banks were lining up to buy shares in Chinese banks to bestow the legitimacy that they needed to sell shares to the world through Hong Kong listings.

Apart from providing a vote of confidence in China's much-maligned and previously insolvent banking sector, foreign investors such as Goldman Sachs, Royal Bank of Scotland, Bank of America and Temasek were supposed to provide the much-needed foreign expertise, particularly in the area of risk management.

But according to numerous people familiar with the deals, the foreigners promised little and have delivered even less, in part because the Chinese banks have not been willing or able to make the most of what their strategic investors offer.

Then the Chinese banks decided they would get that expertise by turning the tables and making their own offshore acquisitions. This has been gathering pace with varying degrees of success.

At the start of this year, Bank of China was the undisputed ambassador for Chinese banking on the international stage, with branches all over the world and a long history as the government's designated foreign exchange lender.

In November 2006, BoC paid $965m for a Singaporean aircraft-leasing business, making it the first of its peers to make a significant offshore equity investment outside Hong Kong. But only one year later and BoC is scrambling to find another large acquisition target to match Industrial and Commercial Bank of China, China Development Bank, Minsheng Bank and Citic Securities, all of which have struck deals to acquire stakes in overseas financial institutions this year.

"BoC is starting to look a bit lame and will have to do something soon," said one senior foreign banking executive. BoC is at present competing with China Construction Bank for the government's approval to go after Standard Chartered but CCB appears to have a stronger case.

The government wants the state-owned banks to compete hard with each other but will not let any of them fall too far behind. While more than 20 per cent of BoC's business is international, CCB's overseas business makes up just 1 per cent of its total and the government has decided it must make a large offshore acquisition to boost its international presence.

The other bank showing interest in Standard Chartered is ICBC, China's largest commercial lender, but the government is - perversely - unlikely to pick it as the designated buyer because it is already doing too well in its foray abroad.

ICBC is the only Chinese bank to have outlined a clear offshore expansion strategy - featuring an emphasis on emerging markets and areas bordering China - and then implemented it, by buying stakes in banks in Indonesia, Macau and Africa in the space of one year. Perhaps coincidentally, ICBC is the only large Chinese bank whose chairman is not a former official from China's central bank.

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