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Asia-PacificSeptember 4 2005

RBS buys 5% of Bank of China

Royal Bank of Scotland (RBS), the sixth largest bank in the world by Tier 1 capital in The Banker’s Top 1000, has spent $1.6bn on 5% of state-owned Bank of China.
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The much-mooted acquisition was well received as the Chinese government agreed a series of guarantees for RBS against some of the financial uncertainties dogging Chinese banks. RBS led a consortium, including Merrill Lynch and Hong Kong tycoon Li Ka-shing, which will control 10% (see comment, page 10).

The ground-breaking guarantees (about which the bank refuses to comment), reportedly include compensation for a sharp fall in the bank’s book value, and if its stock market listing does not go ahead or takes place at a much lower value than expected.

Bank of China, China’s largest bank, has a 13% market share in loans and deposits. It is expected to list in Hong Kong in 2006.

A report from independent analyst firm KBW summarised the market feeling: “Phew, it’s not too bad.” The firm noted that RBS’s stake in Spanish bank Santander was being sold to finance the acquisition, which meant that RBS did not need to ask shareholders for new funds, while it appeared that there was a commitment to no further investment over three years.

This removes the acquisition risk overhang on RBS’s stock. It also gives the bank exposure to China. Less than 1% of its profits currently come from Asia.

It looks as though the Scottish bank’s warranties will set a new standard in Chinese bank acquisitions. Press reports suggest that the Singaporean state investment company, Temasek, is asking for similar warranties against any deterioration in Bank of China’s finances, as it seeks to buy up to 10% of the bank.

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Read more about:  Analysis & opinion , Asia-Pacific , China