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Foreign banks eye up local lenders
By Chen Yao (China Business Weekly)
Updated: 2004-07-07 15:47

Overseas financial conglomerates see mergers and acquisitions with China's city commercial lenders as a means of accelerating their expansion in the country's fast-growing banking market.

Domestic and foreign players are both coveting the vast networks built up by Chinese city commercial lenders and also eyeing up the vast potential of the retail banking market, according to analysts.

They say that the financial giants also see the recent capital constraints faced by city commercial banks as an opportunity to bargain down prices for acquisitions.

China Banking Regulatory Commission (CBRC) Vice-Chairman Tang Shuangning, urged the country's city commercial banks on June 25 to  "restructure themselves and strengthen their capital bases by introducing strategic institutional investors from both home and abroad."

In their latest efforts to tap in the nation's huge banking market, overseas financial firms have entered merger and acquisition talks with China's 112 city commercial banks.

DBS Bank, Singapore's biggest lender, is considering buying stakes in Chinese city commercial banks in order to sustain its annual growth of 50 per cent on the mainland, according to a recent report in the Singapore-based The Business Times.

CITY: Regulators curbing related bad loans

PPF, the Czech Republic's largest financial group, recently revealed to China Business Weekly that it may buy a stake in the Chengdu City Commercial Bank, its first step into China's banking and insurance market.

Yi Xianrong, a senior financial expert with the Chinese Academy of Social Sciences, told China Business Weekly that the main obstacle in the way of overseas financial giants extending their presence in China is their lack of local experience and networks.

Foreign banks normally have the advantage over domestic lenders in offering more diversified financial products and operating more reliable risk management systems, he said.

But domestic lenders, especially the four largest State-owned banks, provide a relatively narrow scope of banking services, including the traditional book keeping, deposit taking and loan making services.

China's city commercial banks, operating a vast network of 5,162 branches across the mainland and employing a total of 109,000 staff, have become one of the country's fast-growing sectors.

Although the country's city commercial banks have inherited a huge amount of non-performing loans from the former 2,194 urban credit co-operatives, their business has grown rapidly in recent years.

City commercial banks assets reached 1.46 trillion yuan (US$176.44 billion) by the end of last year, about 6.27 per cent of the total assets held by the country's commercial banks, according to the CBRC.

Meanwhile, Chinese city commercial banks' average capital adequacy ratio stood at 6.36 per cent, the CBRC said.

"Lack of new capital injection has hindered the expansion of city commercial lenders. Financial risks will soon accumulate in the system if these banks fail to improve their corporate governance," said Xu Dianqing, a professor at the University of West Ontario in Canada and a researcher at the China Centre for Economic Research (CCER) at Peking University.

China's city commercial banks' currently have 116.4 billion yuan (US$14.06 billion) in non-performing loans, or 15.45 per cent of their total loans, according to the CBRC.

Although city commercial lenders have witnessed an increase in bad assets in recent years, they have huge potential for future growth if their risk management is improved, Xu said.

"These local banks have generated enormous loans to small and medium-sized enterprises, which have become the backbone of the country's economy," Xu said.

New CBRC figures show more than 70 per cent of total loans made by city commercial banks have been to the country's small and medium-sized enterprises.

"Foreign lenders would find mergers and acquisitions with China's city commercial banks the fastest way to access the country's banking market," Xu said.

However, banking industry regulators have been cautious of allowing non-banking institutions to acquire stakes in lenders amid concerns that related lending might grow and eventually destabilize the country's financial system, Yi said.

The recent fall of D'long, one of the country's largest private-owned business conglomerates, served to remind policy-makers that city commercial banks, once acquired by non-banking institutions, may be hijacked to make loans without much consideration for the risks involved, according to Yi.

Prior to its forced liquidation early this year, D'long owned 6 city commercial banks across the country and borrowed around 20 billion yuan (US$2.42 billion) from these local lenders in a bid to finance its expansion.

"On city commercial banks, the regulators give their priority to establish a regulatory framework in a drive to help the banks curb inter-related lending," Tang said.

China's banking regulators are also considering encouraging the city commercial banks to expand their local businesses to cities in other provinces.

"Once the city commercial banks reach the standards set by the regulators, they will be encouraged to go beyond their regional markets to compete with other city commercial banks in other regions," said Chen Yuan, a CBRC sub-division head, at a high-profile work conference last week.

According to China's banking laws, a foreign bank is allowed to hold as much as 20 per cent in a local bank while a combined stake owned by foreigners is limited to 25 per cent.

Some large international players are also holding stakes in China's second-tier banks that have the license to expand their businesses nationwide.

HSBC, which has the biggest operation of any overseas bank on the mainland, bought 8 per cent of the Bank of Shanghai in 2001, and started to offer credit cards with its partner earlier this year. It also owns 10 per cent of Ping An Insurance.

Citibank holds a 5-per-cent stake in Shanghai Pudong Development Bank, with which it began issuing co-branded Visa credit cards early this year.

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