Citigroup's Risky Win in China [Wall Street Journal]
Summary: As expected, Citigroup confirmed its $3.1b deal with four Chinese companies, including a partial stake sale to IBM, to take 85.6% control of China's Guangdong Development Bank [GDB]. After a year of tough negotiations and bidding, Citi now must work on restructuring the bank to improve among other things, its assets and lending. Citi was forced to limit its stake to 20% per Chinese law and will sell an additional 5% to IBM. The deal is expected to close by the end of the year. Although this is a huge development for Citi expanding its operations in China from 6 branches to more than 500, GDB is believed to have nonperforming loans around 20% of its total lending. The figure is substantially higher for loans to its own government shareholders. Citigroup plans to play a key role in the bank's daily operations. GDB reportedly earned $210m in pre-tax profit in the first-half of '06, and has $48b in assets according to unaudited results.
Related links: Citigroup press release. • Media coverage: FT.com -- China's new banking regulations, MarketWatch and USAToday. Commentary: Citi Wins Bid for Chinese Bank; Advises US Airways in Hostile Bid for Delta • BofA, Citi Trade Lower after Q3 Earnings • China's Banking Sector Looks Better with New Law. Conference call transcripts: Citigroup Q3 2006.
Potentially impacted stocks and ETFs: Citigroup (NYSE:C), IBM (NYSE:IBM) • Competitors: Bank of America (NYSE:BAC), HSBC (HBC) • ETFs: First Trust Morningstar Div Leaders (NYSEARCA:FDL), WisdomTree High-Yielding Equity (NYSEARCA:DHS), streetTRACKS KBW Bank (NYSEARCA:KBE), Vanguard Financials (NYSEARCA:VFH)
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