China’s banks are on the move. The recent $5.5bn acquisition by China’s largest bank, Industrial and Commercial Bank of China (ICBC), of 20% of South Africa’s Standard Bank Group is not just a landmark strategic investment for Africa, it also represents a possible sea change in global banking as Chinese banks begin the move to prominence on the world stage.
At the end of 2006, according to the China Banking Regulatory Commission (CBRC), China’s five largest commercial banks collectively had operations in 29 countries, comprising 31 subsidiaries, 47 branches and 12 representative offices. But this is mostly through Bank of China, which has been China’s traditional bank overseas for decades. And according to a recent report from US rating agency Moody’s Investors Services, overseas bank profits from outside Hong Kong and Macau accounted for only 2% of overall Chinese pre-tax profits. But this looks likely to change significantly and 2007 represents a major transformational phase.
The march abroad
Following on from buying 90% of Bank Halim Indonesia in December last year, ICBC bought 80% of Macau’s Seng Heng Bank in August for $584m and in late October it made China’s largest foreign acquisition to date with the $5.5bn Standard deal. And others are joining in the march abroad, with China Minsheng Bank, a privately owned bank, buying a 10% stake in a small local US bank UCBH in October for $200m, and China Merchants Bank winning US approval to set up a branch in New York City. With China Development Bank’s $2.9bn acquisition of a 3% stake in the UK’s Barclays in July, the Chinese march abroad has begun in earnest. More moves are likely and ICBC’s application for a New York branch licence has been pending since April.
Whether the US forces ICBC to wait a long time for its licence or whether protectionist measures in the US Congress weigh against Chinese ambitions altogether are issues that remain to be seen, but Chinese banks will continue to spread across the globe.
As ICBC chairman Jiang Jianqing recently told The Banker: “We are targeting markets with strong economic and trade relations with China and, for example, we are applying for an operating institution in Russia.” (See The Banker, September 2007, page 54.)
Meanwhile, the Standard deal is a watershed for China’s banks and both a clear and cautious sign of things to come. Described as a “major strategic partnership” the $5.5bn deal is of huge significance to both banks as well as both countries and Africa as a whole. Standard chief executive Jacko Maree says: “It is the biggest foreign investment by any Chinese company ever and it is the largest foreign direct investment into South Africa since the end of apartheid. Its significance goes way beyond the actual deal between the banks.”
This deal is much bigger than Barclays’ purchase of 54% of South Africa’s second largest bank, Absa, in 2005 and gives Standard huge structural benefits. Standard, with 950 branches, operates in 18 African countries including South Africa, and in 20 countries outside Africa. Having grown its headline earnings per share and dividends per share by, on average, 20% a year for the past 20 years, Standard now has an expanded platform for growth. The deal will give Standard access to the world’s fastest-growing economy and strengthen its capital base and its ability to finance trade flows between Africa and Asia. The complementary aspects of both banks’ networks offer exciting opportunities.
Natural resources
China had invested $11.7bn in Africa up to the end of 2006 and is desperate for natural resources; more than 30% of China’s oil imports, for example, come from 13 of Africa’s 17 oil-producing countries and there are 300,000 Chinese working at present on projects in Angola. Standard’s formidable network across 18 African countries gives ICBC hugely attractive opportunities for synergies and for benefiting Chinese investments. And Standard’s expertise in resources financing and commodities across the globe is also expected to benefit state-controlled ICBC and resource-hungry China.
The ‘strategic partnership’ also involves the creation of a $1bn mining and resources fund, which would invest in resources in emerging markets and help finance China’s commodity needs. Each bank is expected to put in $250m, with the rest coming from third parties.
The Standard deal provides a massive win-win situation for all concerned, including Africa. While big acquisitions such as that of ABN AMRO may grab the headlines, the underlying importance of a transformational deal such as ICBC-Standard cannot be underestimated and Chinese banks will be looking for more of the same. Global banking is definitely shifting.
