Bottom line: BBVA's cut-back in its alliance with Citic represents the latest divorce between western banks and Chinese partners, with little new foreign investment likely in the sector for the next 2-3 years.
A trend that's been quiet for more than a year has popped back into the headlines, with word that Spain's second largest bank has dumped its stake in a holding company tied to Chinese financial services conglomerate Citic Group (OTCPK:CHCJY). This particular deal is being driven by a number of factors, including a need for cash by Spain's Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA). But the bottom line is that BBVA and other major foreign banks have ended most of their similar alliances with Chinese partners over the last 3 years after such tie-ups failed to produce any strategic benefits.
A number of major financial firms, including Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), spent billions of dollars a decade ago to buy stakes in China's leading state-run banks, hoping such ties could give them preferred access to the nation's underdeveloped banking market. But after receiving little or no strategic advantage from the tie-ups, those western firms sold most of their stakes as they sought to raise cash to rebuild their balance sheets after the global financial crisis.
According to the latest headlines, BBVA has now become one of the last major global banks to join that trend with the sale of its stake in Citic Financial Holdings Ltd to Citic Bank. (HKEx announcement) Citic Bank, the banking unit of Citic Group, will pay about $1 billion for the stake, and will become the sole owner of Citic Financial Holdings.
Citic Financial Holdings was set up to hold Citic Group's banking and financial services interests outside of China. BBVA also previously owned about 15 percent of Citic Bank, but pared that to about 10 percent last year by selling part of the stake to the bank's parent. Both stake sales were largely cash-raising exercises for BBVA, which is feeling the pinch of a prolonged downturn in its home market of Spain.
This particular deal could be one of the last major sales of a Chinese financial services firm by a major western bank for a while, though BBVA could further pare its remaining stake in Citic Bank. Before this deal, the last time a major western bank sold down its shares in a Chinese partner came last fall, when Bank of America ended its long-term investment in China Construction Bank, the nation's second largest lender. (previous post)
BBVA's latest sale underscores the failure of this kind of alliance for major western lenders. That's because Citic is considered one of China's most entrepreneurial companies, and thus BBVA's decision to scale back or even end the alliance means foreign banks have decided it's just too difficult to work with most Chinese partners due to cultural and other differences.
That said, the bigger questions become: Have big foreign banks written off the China market? Or if they haven't, then what's their next step? The answer to the first question is most likely "no", as China is too large for many of these banks to ignore. But that said, many foreign banks are probably turning their attention to repairing their core western operations and won't make a major new push into China for at least the next 2-3 years.
Perhaps sensing that waning interest, Chinese media reported last week that Beijing was preparing new rules that would ease many of the restrictions that have made China a difficult market for many foreign players so far. That move would send a signal that Beijing may finally be prepared to welcome foreign banks to China, following this recent string of divorces.
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