Top Chinese Bank Sets Its Sights on Western Peers

on Sep 20, 2012

China Construction Bank (SHA:601939) is targeting European lenders for the country’s largest foreign bank investment to date, The Financial Times reported on 16 September 2012. CCB, China’s second-ranked bank by assets, plans to spend about Rmb100 billion (£9.2 billion) on the acquisition of a whole European bank or, at a minimum, for the purchase of a 30-50 per cent stake in a larger entity, the group’s chairman Wang Hongzhang announced.

CCB is considering Western peers for the future multi-billion investment. Without mentioning individual names, Mr Wang said in an interview for the FT that amongst the potential acquisition options in Europe, banks in the United Kingdom, France and Germany are most attractive. He added that the company has set its sights on an acquisition with a reasonable international presence, rather than just a single-country domestic focus, as such a target would pose fewer “cultural challenges”.

!m[](/uploads/story/418/thumbs/pic1_inline.png)According to investment bankers, appealing targets for the Chinese lender could be banks which have been part-nationalised due to the need for bailouts, referring to Royal Bank of Scotland Group (LON:RBS) and Commerzbank (ETR:CBK). Eighty-two per cent of the British RBS, which has a market capitalisation of £17 billion, is government-owned. Similarly, 25 per cent of the £7.2 billion-worth Commerzbank is owned by the German government.

Analysts have long predicted that Chinese banks with relatively high market valuations could show interest in comparatively cheap western peers. So far, there has been little activity, mainly marked by Industrial and Commercial Bank of China (HKG:1398) and its acquisition of a 20 per cent stake in the South African Standard Bank (PINK:SBGOF). This has been the biggest Chinese bank acquisition deal to date. Yet this is not the only foreign investment for China’s financial sector. The sovereign wealth fund, China Investment Corporation, took big stakes in Morgan Stanley (NYSE:MS) and Blackstone (NYSE:BX) just before their share prices were savaged by the global financial crisis.

The Chinese banking sector has also been relatively active in Europe, with some investments turning out to be not as successful as anticipated. China Development Bank (HKG:1062) has seen a significant paper loss on its investment in Barclays (NYSE:BCS), while the Chinese insurance company, Ping An (SHE:000001) bought a stake in Fortis (currently part of BNP Paribas) just before the Belgian bank split up. Due to these less than successful past forays and Europe’s deepening debt crisis, Chinese regulators have been recommending a safe distance from European financial institutions despite the comparatively low prices which may make investments in the old continent’s banks attractive. Due to the risk, at some point Chinese banks were even advised to avoid basic foreign exchange transactions with certain European counterparties.

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Mr Wang’s predecessor and currently China’s chief securities regulator, Guo Shuqing, insisted last year that only a reasonable price is not enough of a reason to commit to a major investment in a European bank. Mr Guo called for caution when eyeing foreign financial institutions: “Their shares have really fallen. Just looking at the prices, it might seem a good deal. But it would not necessarily suit our development strategy.”

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