Like the mariners of ancient Greece lured to their deaths by the beguiling song of the Sirens, international banks increasingly appear mesmerized by the call to invest in China’s state-owned banking system.
The latest international bank to answer the call is Bank of America, which announced it was parting with a total of $3 billion to purchase a 9% stake in China Construction Bank, China’s second-largest lender.
At first blush, it is difficult to know what to make of this move. BoA wields considerable weight in the US but in Asia it is poorly represented. In fact, it has spent the last few years retreating from the region. In the press conference to announce the deal, BoA CEO Kenneth Lewis talked of the “value in combining [CCB’s] local knowledge and distribution with our product expertise, technology and experience”.
True, the deal makes sense on paper, but all of the risk is in the execution. Initial market reaction was mildly positive. One analyst conceded that the deal gives BoA entry into the world’s fastest-growing economy but also brings some serious risks. Another noted that the deal is not of much material significance to BoA, but provides a good way to get exposure to upside without betting the ranch.
At least Bank of America can point to some genuine commercial benefits that it hopes to scoop from the deal. Few other banks that have courted Chinese lenders can boast that. Indeed many have been gaily throwing their balance sheets around in an attempt to garner little more than investment banking fees.
The latest bank ready to throw itself upon China’s rocks appears to be UBS, which confirmed rumours it was in negotiations to purchase a stake in Bank of China, itself expected to list in 2006. The Swiss bank said it might invest up to $500 million in the country’s third-largest bank, for what it terms a partnership, including “commercial cooperation in certain areas of investment banking yet to be agreed”. For which, in the immediate future, read winning the mandate for Bank of China’s IPO, currently being fought over by a number of leading international banks.
Other than buying itself into the IPO, it is unclear what, if anything, UBS stands to gain from the proposed investment. It has no retail banking business outside Switzerland and it is dubious that a minority investment in a massive state-owned bank is going to do very much at all for UBS’s most valuable business, private banking. A paltry $500 million investment will not buy UBS the key strategic advantages that HSBC is already reaping from its 19.9% stake in Bank of Communications. In any event, if the rumours are to be believed, Royal Bank of Scotland will be the key strategic investor in Bank of China. Whatever fees UBS gleans from the Bank of China IPO will constitute a minuscule return on its investment.
One bank that might have escaped the clutches of the Sino sirens, despite its own efforts, is Citigroup, recently sacked as joint sponsor for the forthcoming CCB IPO. Its crime? Refusing to make good on an alleged promise to invest in CCB ahead of the listing, the reason, apparently that the bank was selected for the IPO in the first place. It seems that, for once, some good old-fashioned business sense at Citigroup got in the way of a large investment-banking fee.
The current deals say as much about the Chinese ability to negotiate as they do about the desperation of international investment banks to find any way into the world’s hottest market.
