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Top News

Roar of China's global bank growth more like a whimper

BEIJING : China's efforts to grow its banking presence overseas are coming under criticism for the limited results they
Published May 25, 2011

BoCBEIJING: China's efforts to grow its banking presence overseas are coming under criticism for the limited results they have produced so far, while costing shareholders a significant sum of money.

Some analysts wonder if the move by China's top banks to grow outside of the mainland's borders through acquisitions and joint ventures is an unnecessary and risky endeavour.

Boosted by bumper profits and rising deposits, state-controlled banking behemoths such as Industrial and Commercial Bank of China and Bank of China are buying into lenders abroad and opening branches overseas.

ICBC, China's No. 1 bank by assets, announced this week it had won a licence for a branch in Mumbai, the first foray by a top mainland bank into Asia's third-largest economy, India.

But some analysts argue that it is a costly distraction, when the resources could be better used to drive the booming business at home.

"It's a poor use of capital," James Antos of Mizuho Securities said of ICBC's acquisitions. "They've spent $9.5 billion in the last five years buying banks with no market share. It's an awfully expensive way to add 3.5 percent to your profits."

ICBC's return on equity in China, for instance, is around 22 percent, while only around 14 percent for its overseas operations, according to Barclays Capital.

China's banks "have a fantastic market that is huge, that's untapped, that's under penetrated," says Charles-Everard de T'Serclaes, a J.P. Morgan executive director. "They can go on creating value for their shareholders for the next 10-20 years without doing anything major."

The banks, through their overseas forays, aim to meet the demands of Chinese customers who are moving abroad, as well as take part in cross-border mergers and acquisitions and offer financial instruments in yuan, the Chinese currency.

ICBC, the world's largest bank by market value, is leading the way, with significant moves such as buying the bulk of Bank of East Asia's US operations for $140 million in January.

Its largest acquisition was buying 20 percent of Standard Bank Group, Africa's largest bank, for $5.6 billion in 2008. The alliance allowed Standard Bank to begin offering yuan bank accounts across Africa from last October.

ICBC has also said it would open five more European branches, and has applied to open branches in Peru and reportedly in Brazil.

Bank of China has 711 operating branches outside of China and frequently opens new facilities, such as a Cambodian branch earlier this month, and last week a "desk" facility inside a local bank in the United Arab Emirates, its fourth such facility in countries where it does not have full-fledged branches, which include Oman, Ghana and Peru.

China Construction Bank Corp (CCB), the country's No.2 lender, eyed a stake in Malaysian lender EON Capital, according to a source, before EON accepted a $1.7 billion takeover by local rival Hong Leong Bank.

But the risks, particularly in mature markets such as the United States and Europe, are seen as high for the comparatively inexperienced Chinese lenders, which still derive the overwhelming majority of their revenue from the domestic market.

"There's a prestige aspect of having branches in London and New York," said Michael Pettis, associate professor of finance at Peking University's Guanghua School of Management.

But up against the sophisticated, deeply rooted banks of America and Europe, "it will be difficult for a while for Chinese banks to be competitive, except on a price basis -- extending loans at very low interest rates," Pettis said.

Chinese banks' attempts to make inroads overseas are also being watched carefully amid continued public suspicion in foreign countries that they are furthering the state's agenda.

China Minsheng Bank, for instance, bought 10 percent of San Francisco bank UCBH for $96 million in 2007, but was turned back by regulators when it tried to increase its share to more than 50 percent, reportedly due to unease over a Chinese bank taking such a high stake.

"Particularly for banks, when they try to make acquisitions in the US, there have been a lot of political obstacles and regulations," says Barclays Capital banking analyst May Yan. "They couldn't do it. That's why they're more active these days in emerging markets making acquisitions."

Indeed, a better strategy may be one that supplements a focus on Chinese growth with selective expansion into emerging markets, say analysts.

Compared with developed economies, emerging markets are less saturated by competition, and China's longstanding trade and foreign aid relationships with the developing world provide a boost for the mainland bank.

In the United States and Europe, "the financial sophistication is much higher than in China, and getting people is a challenge for Chinese banks," says Er-Cheng Hwa, a former chief economist for CCB. "There's not much incentive to move to those markets."

ICBC, in spite of its forays into developed markets, has its eye specifically on the emerging world.

"Over the next several years we will mainly look at emerging countries, and mainly consider their economic potential, growth rate and extent of their trade relations with China," Chairman Jiang Jianqing told Reuters in an interview last month.

Despite the costs and the limited near-term returns, Chinese banks are expected to keep growing their presence abroad as a long-term strategy.

"Yes it's costly, but a lot better that they have services to help their loyal customers rather than scare them away because they cannot provide services that are expected or required," said Zhao Changhui, chief country risk analyst for China Export-Import Bank.

Copyright Reuters, 2011

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