Still banking on a big future
Updated: 2012-11-06 08:07
By Wu Yiyao in Shanghai(HK Edition)
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A branch of the Industrial & Commercial Bank of China Ltd in Beijing. From 2006 to July 2012, banks from China have completed some 14 acquisitions globally, with take-out price to per share asset value at an average 1.8. Nelson Ching / Bloomberg |
As Chinese enterprises are stepping out for their overseas expansion, many Chinese banks are becoming interested in global diversification by buying interests in banks with emerging markets operations, recent research by Barclays Capital points out.
Overseas expansion of China's banks have been primarily focused on emerging markets in the past few years. In 2008, ICBC acquired 80 percent of Macao's Seng Heng Bank and a 20 percent stake in South Africa's Standard Bank in the same year, as well as making investments in Indonesian and Thai banks in 2007 and 2010, respectively.
Mainland banks are naturally interested in expanding their presence in Hong Kong, which is a key off-shore banking market for Chinese corporations and individuals. For example, China Merchants Bank bought Wing Lung Bank in 2008, to expand its business across the border. Chinese banks are not subject to the same restrictions imposed on other overseas banks wishing to acquire a stake in any of the three note-issuing banks in Hong Kong, one of which is a unit of the State-owned Bank of China. While mainland banks are still interested in further expansion in emerging markets, the regulatory and the political risks in those countries and areas, may potentially deter a prospective acquirer, the report said.
Chinese banks are becoming interested banks with emerging markets operations, but under stable regulatory and political environment.
From 2006 to July 2012, China's banks, including the State-owned big ones and private ones of smaller sizes, have completed some 14 acquisitions globally, with take-out price to per share asset value at an average 1.8.
Chinese banking industry has grown rapidly, with the total assets of Chinese banks having reached 123.7 trillion yuan, as of the end of August, 2012. That's up 135 percent from 52.6 trillion yuan as of the end of 2007. The banking industry on the mainland has in general been highly profitable and has further growth potential. After two rounds of interest cuts in June and July this year, some banks still report more than 30 percent net profit growth.
Overseas markets are becoming increasingly inviting because Chinese banks need to expand their international business in order to provide better service to their increasingly globalized Chinese corporate customers and diversify their revenue streams in an effort to weather the ongoing domestic financial reforms and interest rate deregulation.
Another drive for overseas expansion is that the Chinese banking regulator has become less restrictive towards Chinese bank's overseas expansion plans. Probably this reflects the need for banks to lift their international competitiveness and enhance their global influence. The China Banking Regulatory Commission said in its 2011 annual report that it will provide guidance for Chinese banks to deploy their overseas development strategies, prudently, depending on their strengths and capabilities.
Changing global financial climate provides another incentive. After the global financial crisis and European sovereign debt crisis, undemanding valuations of western banks provide an opportunity for potential acquirers. European banks are collectively trading at a historically low level of 0.8 times the price to tangible book.
Overseas expansion for China's banks may also face some obstacles and risks, according to May Yan, director of research, Barclays Capital Asia Limited.
Unlike with non-banking corporates, any bank planning to set up new banking branches and operations in a country has to go through a series of regulatory hurdles. Since banking business is a highly regulated industry, all of a bank's activities are required to obtain different regulatory approvals before proceeding.
Also it may be more difficult to acquire multi-national European banks, as most of the European banks have cross-border operations with significant chunks of their business in different European countries. If a non-European bank wants to acquire a European one with multi-country operations, the acquirer may need to obtain approvals from various regulators in a number of countries.
The influence of governments and regulators over European banks has increased, after the global financial crisis and European debt crisis. In some European countries, banks were nationalized or partially nationalized, which increases the political challenge of selling a major stake in these national banks to foreigners. Acquirers may face lengthy and complex processes for approval, under various structures of banking regulations in various countries.
It may be more difficult to make acquisition for the State-owned banks to make an overseas acquisition as they involve more issues and obstacles, according to Yan.
(HK Edition 11/06/2012 page2)