China’s banks seek cautious steps onto world stage

HONG KONG’S FORTUNES have always been built on the foundations of China. These days, though, Beijing’s orbital pull is greater than ever. The territory’s stock market is increasingly dominated by mainland China listings and the fortunes of its financial community are joined to the hip of China’s continued economic prosperity.

That is especially so in the case of China’s banking industry. It’s successful financial restructuring and world-beating IPOs were executed by Hong Kong’s well-heeled investment banking community from the gleaming tower blocks of Central. Well rewarded for their efforts, Hong Kong’s investment bankers are now beginning to savour the prospects of the next China banking bonanza: an M&A wave as China’s big banks deploy vast sums of capital to compete globally.

So runs the script from the bankers. Matters might turn out a little differently in reality.

"The raging hormones among investment banks are driving some of this China bank fever," says the head of banking at a consulting firm. "They look at the valuations of the banks and salivate. But the banks themselves are more restrained. This is new territory for them."

It is easy to understand the excitement among the investment bankers. By any financial measure, China’s banks are already big global players and their almost complete lack of foreign operations – overseas revenues still account for less than 2% of total revenues among the top five banks according to analysts – makes the need to expand abroad all the more pressing, runs the investment banking pitch to mainland bank clients.

There are also compelling economic, strategic and financial reasons for China’s lenders to move abroad (see story on page 280). And with Chinese bank valuations at a premium compared with most global peers, almost any deal is theoretically within the financial reach of China’s biggest banks.

It sounds compelling. The reality, though, is that although China’s banks are keen to expand abroad, they are cautious about how and when to make their moves.

"The international financial community shouldn’t misunderstand the M&A opportunities for Chinese banks," says Peng Chun, executive director and executive vice-president at Bank of Communications, by most measures China’s fifth-largest lender. "Our board has given two instructions to management. One is to maximize returns to shareholders and the other is to control risks. We think about overseas opportunities given sufficient capital and a strong domestic business but we’re too young as a bank and the domestic marketplace is so huge. That remains our priority."

Chun is in good company. Richard Yorke, president and chief executive officer of HSBC China, Bocom’s banking partner in China, agrees. Despite a crowded banking market and inevitable margin pressure on bank lending from impending interest rate deregulation, Yorke says significant business opportunities for banks remain in China.

"There’s a continued focus on improving credit and underwriting standards," he says. "In retail banking there’s a differentiation between mass market and wealth management and you’re starting to see the development of SME lending models. There’s been such a focus on NPLs in the past and underwriting standards got so tight, banks competed for large names lending at the expense of SMEs and private companies. Around 50% of China’s GDP is produced by this sector so it’s a huge banking opportunity."

Exploring expansion

Although the mainland banks’ primary focus might remain with their domestic businesses, there is also no doubt that they are already considering overseas expansion and acquisition strategy.

"Acquisitions have started to happen and the floated banks all have individuals assigned to explore expansion opportunities" Keith Pogson, Ernst & Young

Those opportunities are expected to follow one or more of several strategic paths, according to analysts. Chief among these is expansion internationally in response to existing corporate customers’ own moves. Chinese resources companies, such as CNOOC, Sinopec and Petrochina, have already expanded aggressively overseas, often through M&A, as have China’s global technology companies, such as Lenovo, TCL and Huawei. These businesses have increasingly sophisticated international banking requirements and China’s lenders have been forced to upgrade their overseas services as a result. This mostly entails overseas branch openings but it is increasingly likely that Chinese banks will consider strategic acquisitions to accelerate the development of branch networks abroad.

"We’re already increasing our overseas branches," says Bocom’s Chun. "We have five already and we’ll open in Macau and Frankfurt in October. Within the next two years, we’re planning to open more branches in Europe, Asia, South America and Russia. If regulators allow, our board is already thinking about possible M&A opportunities."

With Chinese resource companies in particular expanding rapidly into markets traditionally outside China’s Asian sphere of influence, some analysts are suggesting that deals in Latin America, the Middle East and even perhaps Africa might begin to make strategic sense for Chinese lenders. Such a strategy suggests interesting possibilities and rumours of possible deals are circulating already (see box 1).

Other sensible acquisition strategies for Chinese banks entail deals that bring technology, new products and even management know-how.

"Chinese banks are looking at the Chinese economy and asking themselves, ‘what works for us?’" says an analyst. "Can we acquire product innovation, can we buy technology overseas and bring it home? Should we expand across critical trade routes or should we target overseas operations that have become very localized in China – such as Taiwanese tech companies or Japanese manufacturers – and bank them?"