BOC, Scottish bank near US$5b deal

PUBLISHED : Wednesday, 27 July, 2005, 12:00am
UPDATED : Wednesday, 27 July, 2005, 12:00am

Royal Bank of Scotland to buy 15pc of mainland lender in what could be the biggest foreign direct investment in China

Royal Bank of Scotland (RBS) is poised to pay up to US$5 billion for as much as 15 per cent of Bank of China (BOC) in a deal that could set a record for the largest ever single foreign direct investment in the mainland.

The two banks are understood to be close to an agreement after Zhu Min, a BOC assistant president with responsibility for restructuring and listing, visited RBS's Edinburgh headquarters last week.

According to market sources, China's second-largest lender hopes to sell RBS a 10 per cent to 15 per cent stake by early next month after drawing criticism back home for moving too slowly.

'BOC is under a lot of pressure right now,' a banker said. '[It was] the first of the major Chinese banks to boast publicly of talks with potential foreign strategic investors.'

RBS's negotiations with BOC were first reported in April by the South China Morning Post, triggering shareholder concern at the lender's newfound appetite for exposure to China, where it has long maintained only a small presence.

It is understood that RBS, Britain's second largest bank, then signed a non-binding memorandum of understanding to take a 15 per cent stake in BOC.

BOC and RBS officials contacted yesterday either declined comment or said they were unaware of the deal's imminent conclusion.

Last month, Bank of America paid US$2.5 billion, or 1.15 to 1.2 times book value, for a 9 per cent stake in China Construction Bank (CCB). To prevent its interest from being diluted, the US bank will subscribe to another US$500 million worth of shares at CCB's upcoming initial public offering in Hong Kong.

Using that deal as a benchmark, a 15 per cent stake in BOC - which reported a book value of 205.3 billion yuan at the end of last year - would cost about US$5 billion.

BOC is also in discussions to sell much smaller equity interests to two additional financial investors, with the Singapore government's Temasek Holdings and Swiss bank UBS considered the frontrunners.

BOC has said it will limit its foreign strategic investors' combined stakes to 20 per cent initially.

In 2003, the central government selected BOC and CCB to pilot financial restructuring and corporate governance reforms at the Big Four state banks, which also include Agricultural Bank of China and Industrial and Commercial Bank of China (ICBC).

CCB stole a march on its rival by being the first to finalise strategic share sales to foreign investors.

The stake sale to Bank of America was billed by CCB chairman Guo Shuqing as the biggest single foreign direct investment in China to date.

It was soon followed by an agreement to sell Temasek a 5 per cent stake for US$1.4 billion.

ICBC, the country's largest lender, received a US$15 billion bailout in April that marked its official entry into the reform race alongside BOC and CCB. Despite starting its financial restructuring some 16 months after BOC and CCB each received US$22.5 billion bailouts in December 2003, ICBC is catching up quickly.

ICBC hopes to sign a non-binding memorandum of understanding by the end of next month to sell a 10 per cent stake to a group of foreign investors, according to various market sources.

They said these investors were believed to include Swiss bank Credit Suisse, US investment bank Goldman Sachs and German financial giant Allianz Group, the sources said.

Bankers at ICBC and its potential foreign partners declined to comment.