The news in June that Chinese brokerage Citic Securities had agreed to buy a 19.9% stake in the brokerage and research arms of French bank Crédit Agricole – namely Paris-based Chevreux and Hong Kong-based CLSA – was seen by many as a sign that China's strong and ambitious banks were beginning to seriously flex their muscles outside of their domestic market, and with shares in many Western banks going cheap, perhaps the time was ripe for investing in western European or North American lenders.
China's banks certainly have the purchasing power. As the Western banking sector has grown weaker in the post-crisis landscape, their Chinese counterparts have grown stronger. Bank of China, Industrial & Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China lead a coterie of Chinese banks valued at more than $100bn. They are well-capitalised, they are large and they are growing at about 8% annually.
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Against healthy Chinese gross domestic product growth in excess of 8% for several years – and passing 10% in stronger years – they have flourished. "In 2010, the top Chinese banks enjoyed 18% to 20%-plus return on equity, with core Tier 1 ratios of 9% to 10%," says William Nichol, head of financial institutions groups (FIG), Asia-Pacific and Japan, at Deutsche Bank.
Envious glances east
These are conditions of which most Western banks can only dream. Three years after the financial crisis, European and US growth remains stubbornly anaemic and is predicted to continue in this vein for several years. European banks still remain at risk of being engulfed by the rolling eurozone sovereign crisis.
So, with many Western banks struggling and Chinese banks flourishing, the logical conclusion is obvious: the Chinese can and should invest in the West. They should use their huge cash piles to establish joint ventures and partnerships, take sizeable stakes or even buy their Western peers entirely.
Citic’s Crédit Agricole deal shows that Chinese banks are looking for opportunities. And it is not the only bank to have looked outside China. Earlier this year, ICBC bought a stake in Bank of East Asia’s US operations – which includes 10 branches in California and three in New York. This is on top of the purchase last year of a 70% stake in BoEA’s Canadian division. Chinese banks are also rumoured to be looking for opportunities in Germany.
Despite this smattering of activity and talk of interest, however, even the most gung-ho corporate financiers believe the obvious conclusion is not necessarily the correct one. While it is abundantly clear Chinese banks are cash-rich and Western banks are cash-poor, it is less clear why the Chinese would want to spend their cash rescuing, supporting or partnering with their Western peers.
“What is the rationale of buying a large bank in a geography expected to grow at between 1% and 3% over the next 10 years?” asks Rob Jesudason, head of global emerging markets FIG at Credit Suisse. Another senior banker adds: “The Chinese have many uses for their capital in China. It’s very difficult to justify Western investment when domestic growth is so strong.”
No Chinese saviour?
From a Western perspective, this may be unwelcome – and unexpected – news. Used to considering themselves experts in financial services, many Western professionals in the sector would naturally expect their services and their banks to be in demand.
William Nichol, head of financial institutions groups, Asia-Pacific and Japan, Deutsche Bank
"There are an awful lot of inbound enquiries. Every mergers and acquisitions [M&A] vendor is always keen to ask about China. The rationale for the interest exists given the growing prominence of the Chinese banks in the past several years since their initial public offerings. [That rationale is:] 'They are big and highly valued, and we are relatively cheap so this creates an opportunity for them to invest in us.' But at the moment, there is very little evidence that Chinese banks are focused on acquisitions in the West," says Mr Nichol.
A number of reasons lie behind this reluctance, some of which relate to issues in China, some of which relate to issues in Asia, and some of which relate to issues in the West.
“In terms of key priorities, Chinese banks focus first on their domestic market where the growth and size of the economy provide huge opportunities. After that the acquisition of a significant presence in Hong Kong is an important strategic goal. At the same time they are now looking at expanding in other parts of Asia, where China has growing commercial and trading relations. The next step will be to invest into financial institutions in Europe, Africa and the Americas," says Stefano Marsaglia, chairman, FIG investment banking at Barclays Capital.
In other words, most Chinese institutions are currently focused on the domestic market and the immediate environs, hardly surprising when China itself is not only growing faster than most of the rest of the world but is also home to more than 1.3 billion people.
Asian opportunities
The statistics become even more compelling when the rest of Asia is thrown into the mix, including populous and fast-growing nations such as Indonesia, the Philippines and Vietnam, as well as the more sophisticated economies of Singapore, Hong Kong, Malaysia and, of course, Japan.
And then there is past experience. Wariness about the world beyond Asia has intensified following the acquisition by Chinese insurer Ping An of a 4% stake in Benelux insurer Fortis. Ping An paid €1.8bn to become the largest shareholder in Fortis back in 2007. But the deal ended in disaster and embarrassment following the financial crisis. Although four years have passed since that investment was made, the scars remain and Chinese regulators do not want to lose face again.
“Chinese banks, perhaps more so than in other part of the world, work quite closely within the guidelines and in support of the economic objectives set by government authorities. As a result, the senior management tend to approach international growth carefully. This means Chinese banks have been, up to now, quite cautious about expanding internationally, particularly when it comes to buying large banks with a different culture and management style from their own,” says Mr Marsaglia.
The failure of Bank of China to gain government approval for its plan to acquire a 20% stake in La Compagnie Financier Edmond De Rothschild is seen by many observers as a case in point. The target, a conservative private bank, was scarcely a racy proposition and the investment would have been for less than €250m. Even so, back in 2009, it was rejected by the Chinese authorities.
Cautious approach
Caution remains the watchword today. Even the deals that have been done, such as the Citic/Credit Agricole tie-up or the Bank of China/Bank of East Asia transaction, can be deconstructed in such a way as to show they are unlikely to precipitate a stampede of M&A activity from China to the West.
“Citic is an investment bank rather than a commercial bank. It has always had a more international focus and it makes sense for it to link up with Credit Agricole’s broking businesses, particularly CLSA in Hong Kong. As for the Bank of East Asia and Bank of China situation, there is a long relationship between the two banks and the top [management] know each very well,” says one Asia-based banker.
Against this backdrop, speculation that the Chinese may be eyeing up the UK government’s stakes in Royal Bank of Scotland and Lloyds Banking Group are considered premature at best. Likewise suggestions that chunks of other European financial institutions could soon be snapped up by hungry Asian predators.
“Talking to Asian institutions, you do not get the sense at all that they are keen to do something by the end of the year. Economic conditions in most of Europe remain tepid and external bidders would probably be reluctant to invest in slow-growing economies. The regulatory environment is in flux too, so capital and liquidity requirements remain unclear. Finally, it is by no means clear how welcome the Chinese would be. There is still a lot of resistance about foreign banks’ involvement in the European financial sector and regulators are highly cautious about any external takeovers. The scars of the financial crisis are still too raw. No one wants to give the general public the impression that they have rescued the banks only to give them to foreign owners once they have been restructured,” says Mr Marsaglia.
No advantage
Many Asia watchers go further in their dismissal of the notion that the Chinese may be considering investments in Europe’s financial wounded.
"From a Chinese perspective, it does not make a whole lot of sense at this time given the sovereign volatility. It may work for the Western entity to get a new strong shareholder, and the prospect of closer ties in China, but what are the Chinese getting – particularly given the external risk profile?" says Mr Nichol.
“If you are a $100bn bank, operating in a country growing at about 8% per annum, and you buy a $50bn bank on a continent growing at 0.2% per annum, you have to find an awful lot of synergies not to get downgraded. On top of which, your currency is appreciating and the euro, for example, is depreciating so you are further disadvantaged,” says Mr Jesudason.
Scepticism about Europe and the US among would-be Chinese investors has seemingly increased since the financial crisis. “Five or six years ago, the Chinese were really keen to access Western expertise. Now they look at the financial institutions they used to revere and see how badly they went awry and how much shareholder value has been destroyed. That makes them far more questioning about buying into European or US banks,” says one Asian-based corporate financier.
Emerging market target
For the moment, in fact, most Chinese banks are focusing on Africa and Latin America, if they are looking anywhere beyond Asia. Chinese companies and state-owned institutions have become gradually more interested in these emerging markets, with their extensive natural resources, which are so desperately needed as China builds out its infrastructure.
“The Chinese banks are following their customers. These customers are looking at investments in commodity-based economies such as Latin America, Africa, Indonesia and Australia, and the obvious step for the banks is to finance this trend,” says Mr Jesudason.
ICBC is a case in point. It already owns 20% of South Africa’s Standard Bank, a deal that cost $5.6bn in 2007 and which continues to prove mutually beneficial. Rather than destroying value or proving to be a source of shame, the South African deal is something of a triumph. ICBC has also invested closer to home in Macau, Hong Kong and Indonesia; now it is rumoured to be looking at Argentina.
“The Chinese are much more focused on Africa and Latin America, which is logical because it is consistent with Chinese political interests. And given that the Chinese economy is growing at 5% to 10% a year, they want to do deals in countries with similar characteristics,” says one Singapore-based banker.
Some interest
That does not mean there will never be closer links between Western and Eastern financial institutions. Most followers believe, in fact, the Japanese may be more interested in such deals, as their own growth is low and they are more experienced on the international M&A field.
Sumitomo Mitsui, for example, entered into an alliance with boutique US investment bank Moelis earlier this year and Mitsubishi, which already owns Union Bank and Frontier Bank in the US, has been linked with other acquisitions in the country.
For the Chinese, however, interest in Western financial services is likely to be gradual and specific.
"When the Chinese make acquisitions, they are not looking to make a quick corporate finance gain. They would rather do a transaction that makes operational sense, that is additive for the growth of their business, and something they can control," says Mr Nichol.
This almost certainly excludes large commercial banks, such as RBS in the UK or some of the German landesbanken. While these may be cheaper now than they were four years ago, the benefits of acquiring them are unclear, particularly for managers inexperienced on the international stage.
More likely, perhaps, are deals involving particular areas of expertise, such as broking, private banking or even highly specialised areas such as aircraft leasing. “These are all areas where the West can offer tangible expertise,” says Mr Jesudason.
In time perhaps, more broadly based transactions may evolve, as Chinese companies become more global and their bankers follow them West. But most observers believe this will take several years.
“At some stage, you will see large Asian players buying big businesses in North America and Europe and if the Chinese want to be their bankers, offering them global services and products, they will have to build global platforms, which could well involve acquisitions or joint ventures. But this will evolve over the next five to 15 years. We are not talking about today or tomorrow,” says Mr Jesudason.
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