Part 3: Financial Services
The following is part three of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1 and part 2). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's financial services industry.
Expansion abroad is a top priority for China's financial institutions. Given the current worldwide financial crisis, and relatively large amounts of liquidity at their disposal, Chinese banks are in a good position to make meaningful progress towards this goal. 100% of large industry leaders interviewed have already started moving overseas, and all respondents have either begun the move or plan to begin within the next five years.
However, there is fear right now by the Chinese Government that too much losses will be incurred by financial institutions if they go abroad and buy non-transparent financial assets which will slow some of the acquisitions. Perhaps their experience with Non-performing Loans (NPLs) make them cautious. For instance, the Bank of China has not gotten final approval yet for its announced 20% stake in Rothschild. Expect this cautious note to prevail for the next several months as the China Investment Corporation (CIC) has been burned with investments in Morgan Stanley (NYSE:MS) and Blackstone (NYSE:BX). While the CIC is an investment vehicle and not an actual bank like an ICBC, the experiences of CIC clearly is influencing all relevant regulatory bodies in China and making them think thrice before giving approvals.
Chinese financial institutions initially moved overseas to serve corporate clients expanding their businesses abroad. Maintaining these clients' business is a top priority today as well, as increasing numbers of Chinese companies move overseas, and competition increases at home with the influx of foreign banks like Citigroup (NYSE:C) and Standard Chartered. These initial moves abroad came about via organic growth as well as M&A.
Perhaps most importantly, Chinese banks are viewing expansion abroad as a way to get training in management, organization, and risk assessment. ICBC [1398.HK] paid $5.6 billion USD for a 20% stake in South Africa's Standard Bank [JNB:SBK] last year, for example, not only to better serve the growing ranks of Chinese companies doing business in the region, but to learn technical skills, management and operation techniques directly from their partners. These ventures are opportunities to train their own talent and to attract foreign talent for their future oversea expansions.
Current Situation and Methods of Expansion
Chinese financial institutions are using M&A to build more quickly a meaningful strategic presence abroad. The first major stake by a mainland Chinese bank in a European bank was made in July, 2007, when the China Development Bank (CDB) purchased a stake in Barclays Bank [LON:BARC] in order to help finance the British group's bid for Dutch ABN AMRO (ABN). While Barclays did not ultimately win the bid, CDB successfully established partnership with one of the top global commodity banks. CDB expects to learn from Barclays expertise in global commodity markets, investment banking, and risk management.
The first strategic investment by a mainland Chinese bank in a U.S. bank was made last October when China Minsheng Bank bought 5% of UCBH Holdings, the holding company of San Francisco's United Commercial Bank, a bank catering mainly to small and medium-sized local Chinese-American run businesses. Minsheng purchased another share in March for a total 9.9 percent share valued at 2.5 billion RMB ($317 USD). Minsheng intends to purchase another 10 percent before the end of 2009.
Last November, China's Ping An Insurance Company [SHA:601318] became the largest shareholder in Belgian financial company Fortis N.V., having acquired a 4.18% stake for €1.81 billion ($2.7 billion). This past March they upped that stake to 4.99%, in addition to purchasing half of Fortis' asset management business for €2.15 billion. The business will be rebranded as Fortis Ping An Investments.
As recently as September 2008, Bank of China announced its plans to purchase a 20% stake in French bank LCF Rothschild for 236.3 million euros ($340 million USD). The two banks will work together to develop asset management services for China's newly wealthy once approval is given.
Chinese financial institutions' push overseas will not be without its challenges. Chinese banks still face significant rules and regulations, as well as a degree of suspicion and protectionism as they move to expand abroad. One of the main reasons UCBH was willing to partner with Minsheng Bank, for example, was, as a private bank Minsheng had minimal connections to the government, and thus the partnership was more likely to be approved by the Fed. Satisfying requirements of regulatory bodies like the Fed, and learning how to operate under these rules in a new business environment were considered key challenges by a majority of respondents.
As mentioned previously, in addition to financial return on investment, Chinese financial institutions' push to acquire stakes in international heavyweights is in large part to get access to management, organizational, and technical expertise not yet fully developed at home, and assistance in developing new service areas, such as wealth management in the case of Bank of China and LCF Rothschild. Respondent companies overwhelmingly agreed that finding people with experience leading a cross-cultural operation overseas, and people with the necessary technical, managerial, and/ or operational skills is a top challenge in their push abroad. With the Wall Street calamity, Chinese financial institutions have been increasing their recruiting of mainland Chinese who work(ed) in Wall Street and are now vying to come back to China.
While Chinese financial institutions are still in the early stages of moving abroad, this presence was increasing rapidly as Chinese banks conduct M&A in target areas until the financial crisis. These institutions are generally moving first to developing regions, where the business of their Chinese clients is increasing most rapidly, though they continue to work towards building presence in North American and Western European countries as their ultimate goal. Expect the pace of M&A to slow down in 2009 as a note of caution prevails but the long-term trend is clear.
Chinese financial institutions need time to find and train the right talent, as well as time to improve operations and organizational structure to be competitive in international markets. Banks should continue to view expansion methods such as M&A as an opportunity to learn and strengthen the skills they currently lack in addition to a fruitful investment.
It is also important for the larger banks to adapt and become more client focused. Too many of the big banks -- Bank of China and ICBC for instance -- focus more on State-Run Enterprises and on political issues than on developing the services that cater to the needs of SMEs and retail clients. In the China market, they lag behind nimbler private banks like China Merchants Bank in customer satisfaction.
The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at cmrconsulting.com.cn.
CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.