With an eye on China’s burgeoning consumer credit and retail markets, two American companies have invested in the future of Shenzhen Development Bank. Stephen Timewell reports.
As the major Chinese banks begin to discover the exciting growth potential of retail banking, major foreign investors are also seeing that the consumer credit industry in China is in its infancy and are buying a stake.
Shenzhen Development Bank (SDB), the 16th largest commercial bank at the end of 2004, was the target of San Francisco-based Newbridge Capital in December last year.
Newbridge bought an 18% stake in SDB from four government-controlled shareholders for $149m and in May Frank Newman became the first foreigner to become chairman of a Chinese bank.
“SDB had a national network across 18 cities and a set of non-performing loans (NPLs) that needed to be dealt with, but basic business was good with underlying earnings good, showing a modest 15% return, with a broad spectrum of corporate business and growing retail,” Mr Newman tells The Banker.
US cavalry
With the arrival of an international management team, including president Jeffrey R Williams, who headed Citibank’s Shenzhen office in 1988, SDB is building up a formidable team and strengthening the bank.
Mr Williams acknowledges they have had quite a task. “When we arrived we had to deal with a core capital of just 2.4% and 11.4% in NPLs at the end of 2004. Our first job was to stabilise business growth.”
Mr Williams focused heavily on collections and provisioning, taking Rmb1.4bn ($173bn) in provisions this year, and improving the capital ratio to 3.4% at the end of the third quarter, still well below the 8% set by the China Banking Regulatory Commission.
As SDB, the first publicly traded bank in China, started to get into better shape and more centralising systems were introduced across the network of 247 branches and sub-branches, the bank announced in October an important strategic alliance with global giant GE Consumer Finance (GECF).
Under the agreement to develop consumer finance opportunities in China, GECF will acquire newly issued shares in SDB valued at $100m. In association with the 7% equity investment, which brings the foreign investment in SDB up to the 25% ceiling set by the government, GECF will agree to cooperate with SDB to provide expertise in retail consumer finance, including management expertise, risk processes, product development and systems.
“The consumer credit and retail banking markets are an important part of our growth strategy in China,” says Mr Williams. “The alliance with GECF allows us to grow the business more quickly with a world-class partner known for its consumer finance offerings and strong global risk management standards.”
Credit card market
At present, consumer only accounts for 10%-15% of SDB’s lending and Mr Newman believes the alliance with GE will help expand the consumer segment, especially, for example, in the relatively unexplored world of credit cards and related activities.
Besides the consumer segment, Mr Newman believes the bank will try to do more corporate and trade finance – self-liquidating businesses. He adds that consumer presents great opportunities as long as NPLs are not increasing and the capital ratio is increasing and hopes the GE capital injection will put SDB’s ratio over 4% by the end of 2005.
For Mr Williams the growth of the middle class in China represents the best guarantee for the growth of the consumer business over time. With a national network and 7000 staff, SDB is well placed to capitalise on this middle class lending growth (11% so far this year) and the bank is feeling bullish about its prospects.
For GE the investment into a Chinese lender is said to mark a milestone for its business in the world’s most populous nation. Its consumer finance unit expects to generate about 75% of its profit from outside the US this year.
The world’s second largest company by market value now has 12,000 employees and 36 branches and offices in China along with investment in excess of $1.5bn. China’s huge retail story has only begun to be told.
