As President Hu Jintao was leaving the U.S. after his four-day state visit, Industrial & Commercial Bank of China announced plans to move in. ICBC, the world’s largest bank by assets, has agreed to take control of Bank of East Asia’s U.S. operations, which include 13 retail bank branches in New York and California. ICBC is to pay $140 million for an 80% stake, subject to approval from Chinese and American regulators, Hong Kong-based Bank of East Asia says. The two struck a similar deal last year with ICBC taking 70% of Bank of East Asia’s six Canadian branches.
Chinese investments in American financial services firms by taking minority stakes in the likes of Blackstone and Morgan Stanley have a hapless record, mostly because the last round came before the global financial crisis of 2008 which made a nonsense of the valuations. Buying a network of retail branches is a new tack, and echoes what Chinese banks having been doing elsewhere in the world, if not yet in the U.S.
Jiang Jianqing, ICBC’s chairman, says:
This unprecedented acquisition of a controlling stake in a U.S. commercial bank by a mainland bank is strategically significant. The successful completion of this transaction will not only establish a good foundation for the provision of holistic financial services by a mainland bank in the U.S., but also will mark a new era of open-market co-operation between China and the U.S., and have a positive impact on Sino-US trade relations.
A previous attempt to buy a bank in the U.S. was torpedoed by Washington’s Committee on Foreign Investment in the U.S. (CFIUS), which reviews proposed foreign acquisitions of U.S. firms on national security grounds. The committee will be among the regulators weighing in on ICBC’s deal because ICBC is state-owned. The bank already has a securities business in the U.S., bought from BNP Paribas last year, but the purchase of retail banks comes under closer regulatory scrutiny. That is as much an examination of the acquiring bank’s home regulatory regime as it is of the bank itself.
ICBC can expect to wait a while. It took the bank two years to get a license for its existing commercial banking branch in New York. Whether the process is swifter in this case would be a good barometer of the state of Sino-American relations in the wake of Hu’s visit.
The great shoring up of China’s state-run banks continues with Bank of China’s announcement that it is seeking to raise 60 billion yuan ($8.9 billion) of new capital through a shares issue in Shanghai and Hong Kong. This follows the $5.9 billion that the bank, the country’s fourth largest lender, raised via convertible bonds last month. Bank of China was one of two of the four big state-run banks (China Construction Bank was the other) that fell below the regulators required capital adequacy ratio in March,
Agricultural Bank of China, the no 3 lender, is looking to raise $23 billion through what would be the world’s largest initial public offering (final pricing due on Tuesday). ICBC and China Construction Bank, the two biggest lenders, have also said they plan to raise new capital.
We hear that institutional investors have modestly oversubscribed their part of the Agricultural Bank’s issue, unlike the manic demand that surrounded the last round of Chinese state-bank capital raising in 2006. They are not alone in their nervousness. In May the state council reduced its targets for the big four’s capital raising to a total of 287 billion yuan, down from the original 331 billion yuan seen a necessary to boost the banks’ balance sheets following the record lending undertaken over the past couple of years as part of the government’s stimulus program.
Quite how many bad loans will turn out to be sitting in those swollen loan books is the million dollar question. With as much as 20% of the loan assets of China’s banks now sitting in the unregulated underground banking system that operates at the county and city level, often hand in glove with local officials, we may not know until it is too late.
Filed under Economy, Markets
China’s banks are taking their lumps from losses on trading mortgage-related securities, even while the strong domestic economy is boosting profits.
Bank of China reports a larger than expected $1.3 billion of subprime writedowns while Industrial & Commercial Bank of China, the world’s largest bank by market capitalization, reported $400 million-worth. Bank of China says it has sold down its exposure to subprime mortgage-related mortgages to $5 billion from $9.5 billion in August. ICBC says it holds $1.2 billion of such securities, the same level as last June.
Both banks were announcing their 2007 results: net income up 65% at ICBC and 31% at Bank of China. The average for China’s 14 publicly traded banks is 70%.
That number will shrink substantially this year as the government turns the screw on bank lending as it tries to damp down inflation.
They used to say of the British empire that trade follows the flag — and that the bankers were never far behind both. So, too, it seems with China.
Industrial and Commercial Bank of China is to take a 20% stake in South Africa’s Standard Bank, Africa’s largest, according to various reports. It is paying $5.5 billion. Standard Bank told shareholders earlier this week that it was in talks with an unnamed potential investor.
The stake represents a substantial step up in China’s involvement in Africa, which has largely been in natural resources hitherto via its program of aid and cheap loans in return for access to energy and minerals.
Standard is one of South Africa’s blue-chip banks and operates in 18 African countries, and there is plenty of opportunity for an African bank to finance the growing trade and investment between China and the continent. However, one sign of the concern the deal is raising in some quarters is that word is that South Africa’s central bank has put a cap of 25% on ICBC’s ownership of the bank.