Bold deals, such as Royal Bank of Scotland’s 5% stake in Bank of China, show that the sector’s entrepreneurial spirit is alive and well – and that flare is often needed to overcome shareholder timidity.

Concerns about high oil prices and their impact on the global economy have not dampened bankers’ enthusiasm for making bold moves. In the past few weeks, Royal Bank of Scotland (RBS) has taken a 5% stake in Bank of China (BoC) – Fred Goodwin’s “ticket to the game”; Citigroup is considering raising its stake in Shanghai Pudong Development Bank; Raiffeisen has bought Ukraine’s Aval; and, last but not least, Macquarie Bank is considering bidding for the London Stock Exchange (LSE). Who ever said banking was dull or lacking in entrepreneurial ‘get up and go’?

All these initiatives show flare and imagination as well as solid strategic thinking on the part of managements that want their institutions to be key players in 21st century banking. By contrast, it is the shareholders that often lack the vision to realise where the game is headed and to appreciate that not shelling out for a ticket now could be even more costly in future.

Unique deal

RBS responded to shareholder worries about overspending by coming up with a unique deal that promises to change the mould of future China deals.

‘Canny’ is the appropriate word to use in the Scottish context and RBS has it in spades. By joining forces with Merrill Lynch and Hong Kong billionaire Li Ka-shing, RBS gets more bang for its buck, paying $1.6bn for a 5% stake while leading a consortium that controls 10%. RBS will have a majority of the seats on the nine-strong committee managing the consortium’s BoC investment, and RBS chief executive Sir Fred Goodwin is expected to take a seat on the BoC board.

To pay for the BoC stake, RBS sold its equity holding in Santander, with Sir Fred saying it was no coincidence that the values of both investments were quite similar.

The really ingenious part of the deal, however, was the guarantees that RBS has wrung from the Chinese government should the investment turn sour. There are warranties covering a fall in BoC’s book value and to cover the risks of an initial public offering being delayed.

These are major concessions and anyone who has ever negotiated in China knows how difficult they must have been to obtain. China’s officials may already be saying that they gave too much away because Singapore’s state investment agency Temasek is now pressing for similar guarantees for its proposed BoC stake. Singaporean claims on having the inside track in China must now be found wanting if RBS can lead the way in such deals.

World focus

China will remain the focus for the world’s leading banks for some time to come and, not to be outdone, Citigroup is talking about raising its stake in Shanghai Pudong Development Bank from 4% to 20% at a likely cost of $500m.

In tackling China, bankers are falling into two distinct camps: those like RBS, Merrill Lynch and Bank of America, which have opted for small stakes in the big four banks (BoA is paying $3bn for 9% of China Construction Bank), and those like Citigroup that want a bigger stake in something smaller.

Others in the former category could be UBS, CSFB and Goldman Sachs – all reported to be negotiating for stakes. ING and Commonwealth Bank of Australia fall into the latter category and they may be followed by Standard Chartered, JPMorgan and Deutsche Bank (the German bank is said to be negotiating with Huaxia Bank). HSBC falls between categories having taken 20% in Bank of Communications, China’s fifth largest bank.

Eastern Europe push

Active as the China market is, it has not been the only focus of action. Raiffeisen International has continued its push into eastern Europe by purchasing 93.5% of Bank Aval, Ukraine’s second biggest bank. Combined with the Austrian bank’s existing operation, this will give Raiffeisen the largest franchise in Ukraine.

In a month packed full of excitement, the most audacious move of all has been Macquarie Bank’s indication that it wants to bid for the LSE. At first glance, it doesn’t add up. Other potential buyers of the LSE are European exchanges that bring with them expertise and the ability to strip out costs. What on earth could an Australian investment bank bring to the party?

Macquarie has carved out a successful niche for itself in buying up infrastructure and property assets and realising their hidden potential. The LSE is infrastructure (though not of the bricks and mortar variety) and with imagination, it is possible to see that an outsider like Macquarie could release hidden value.

Fortune favours the brave, it is said, and on the evidence of all these initiatives, the banking industry has a bright future.

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