At last the fate of Guangdong Development Bank is known. Last month the bank, based in southern China, accepted a $3.1 billion bid for an 85.6% stake from a consortium led by Citigroup. The bid beat off a rival one put forward by another group, led by French bank Société Géneralé, and ended 16 months of uncertainty.
For Citigroup, whose own stake in GDB will be 20%, the outcome will come as a great relief. The bank is already paying catch-up against some of its rivals in China, most notably HSBC, which has a 19.9% stake in Bank of Communications, the mainland’s fifth-biggest lender. Failure in its bid for GDB would have left a massive hole in Citigroup’s emerging markets, nay global, strategy – one that it might have struggled to properly fill.
It is worth pointing out that Citigroup is pursuing a very different China strategy to that of many of its main rivals. While banks such as HSBC, Bank of America and Royal Bank of Scotland have taken stakes in the big-five state-owned lenders and have seen the value of their shares soar following successful IPOs by their investments, Citigroup has focused on the middle market.
Its main presence in China before the GDB deal was through a 4.6% stake in Shanghai Pudong Development Bank, which it hopes soon to raise to 19.9%. SPDB has total assets of Rmb630.23 billion compared with Bank of Communications’ Rmb1.6 trillion ($203 billion). Citigroup did enter negotiations to buy a stake in China Construction Bank before its IPO but that deal fell apart. Instead, Citigroup had to watch from the sidelines as Credit Suisse took up the stake and subsequently part of the underwriting fees from CCB’s $9.2 billion IPO.
Citigroup will hope that the GDB transaction will now give it a platform in China to build a truly strategic relationship. GDB, which has 500 branches, is located close to Hong Kong and will enable Citigroup to leverage off both the mainland and the SAR economies.
The initial analysis of the deal has been generally favourable, with Fitch Ratings viewing the acquisition as “credit positive”.
Nevertheless there are a number of outstanding issues that Citigroup needs to address before its shareholders can get too excited. The first concerns the state of GDB itself. The bank, which is apparently China’s 11th biggest lender, has not published its official financial figures since the end of 2004. At that time its non-performing loans ratio was a sizeable 16.6%, its return on assets a pathetic 0.03% and its ratio of equity to assets a meagre 1.5%. Fitch has an individual rating of E on the bank, the lowest it gives. No doubt Citigroup and the rest of its consortium have seen more up-to-date figures. These need to be made public as soon as possible.
Then there is the issue of the consortium. Initially Citigroup teamed up with the Carlyle Group, seeking a combined 49% of GDB, with the US bank taking a majority stake. That bid would have required the Chinese authorities to waive a rule that limits foreign ownership in mainland banks to 25%. The authorities declined. So Citigroup came back with new partners. As well as the US bank, the new consortium comprises computer technology group IBM, which will take a 4.74% stake, Chinese utility State Grid and insurer China Life, which will each hold a 20% stake, Citic Trust, which will own 12.85% of the shares and Puhua Investment, which will have an 8% stake.
Reports suggest that Citigroup will assume operational control of GDB, with seats on the board (though no details have been provided about how many). Even so, the presence of so many partners is bound to raise questions. How will these different groups get on when nitty-gritty decisions have to be taken? Will the Chinese shareholders gang up against the two foreigners to protect their interests? Will the different cultures of the respective shareholders clash or gel? Are all of these investors committed for the long term?
The final issue Citigroup needs to address is how it plans to run both GDB and SPDB. Will they continue to be handled as separate entities or will there be some form of integration?
It remains to be seen how these investments will be managed and whether the bank’s gamble in both will pay off in the long run.
