Halim the first stepping stone as China banks venture overseas
How to cross an unknown river? Deng Xiaoping said: 'Feel the stones.'
The little-known Bank Halim of Indonesia is the first stone for not just the Industrial and Commercial Bank of China but also for the country as they take steps towards building one or more homegrown banks that have international reach.
Bank Halim was not the largest or most influential of targets on a list of proposals prepared by ICBC's financial adviser, DBS, a year ago. But ICBC picked it.
'This is the first bank acquisition by a Chinese entity overseas,' says an insider. '[ICBC] would rather be cautious. Bank Halim is good test case.'
Yes, Bank Halim is a local lender with no nationwide network. But ICBC, with its international recognition, needs no national brand, as insiders suggest. Yes, pricing of an Indonesian bank's assets is not a buyer's call. But that's also not a problem for cash-rich ICBC.
The pros are many. Bank Halim has a relatively clean balance sheet. It is wholly owned by a family that wants to sell everything and with no open bidding. Indonesia has a young population, a growing middle class, the oil that China needs and a government that welcomes foreigners in consolidating its fragmented banking industry.
These are attractive features to ICBC, for whom acquisitions are not a run of the mill part of its business as they are with its international counterparts.
Through this deal it has learned how to put together an acquisition team, where to negotiate on and how. The hunter has now geared up.
'Don't be surprised if you see more buying from ICBC in the coming year,' the insider says.
ICBC is not alone. In the past week, we heard that China Construction Bank had completed its acquisition of Bank of America in Hong Kong. And Bank of China has been buying Singapore Aircraft Leasing Enterprise, the largest such company in Asia.
The eyes of mainland lenders are not fixed just on Asia. CCB reportedly is looking to buy an American bank worth between US$1 billion and US$5 billion.
Some readers may recall the days when Japanese firms bought several banks in the region and then ended up selling most of them during Japan's prolonged financial crisis.
The buying we are seeing now is different. The Central Government has made clear its determination to nurture several international banks that are strong and global enough to pursue the country's national interests.
It's not about cash-rich mainlanders snapping up Gucci and Van Gogh. Behind the Big Three's 'going out' is the state mission. The banks themselves also see a pressing need to go global as their customers are already taking the plunge.
The banks' successful listing in Hong Kong has armed them with not just the money but also the structure to start the hunt. Even so, there are external and internal challenges.
Externally, the mainland banks will be locking horns with many bidders in a world awash with cash. Bank acquisitions in Southeast Asia in the past two years highlight the point (see table).
There are lenders that seek overseas growth to mitigate falling margins at home. Even South Korean banks such as Hana, which have been struggling with financial recovery until recently, established offices in Hong Kong late last year to pursue acquisitions overseas. Private equity funds, which are estimated to be sitting on US$200 billion after a record-breaking 2006, are also part of the hunt.
Against these more sophisticated contenders, the mainland banks can offer ties to China Inc, an exposure to the vast Chinese customer base and consumer market that will be attractive to many lenders.
Overseas regulators are also happy to open doors to reputable banks not otherwise represented in their countries, making mainland entities welcome as part of a balanced development in the industry.
Relatively speaking, the real challenge is in banks' managements ability to find the right asset and create value from it.
A Deutsche Bank study shows mainland firms' overseas acquisitions are rarely value-creating, either in terms of profit or share price. Natural-resource acquisitions are the few exceptions.
The Big Three mainland banks, having walked away from huge bad debt thanks to government subsidies and having only recently established a new governance system, have yet to prove their ability to defy this norm.
'So far they are buying to support their customers. That's not a problem,' says Bill Stacey, Credit Suisse's head of Asia banks research. Such deals were within the banks' managerial skills and the financial demands were limited.
On the other hand: 'If one launched a credit-card business overseas or went for an offshore retail franchise, I would be worried.'
