Mexican wave may rock mainland banks
How times change. As recently as two years ago, mainland banks looked desperately enfeebled. Burdened by sky-high levels of non-performing loans and hobbled by old-style command-economy management structures, they appeared technically insolvent and close to collapse.
To pull them back from the brink, mainland bank bosses scoured the world for foreign banks prepared to come in as investors and help shore up their crumbling capital bases and introduce much-needed commercial management techniques and technological know-how.
In turn, three of the four big state-owned banks and a clutch of smaller institutions signed up foreign partners including Bank of America, Royal Bank of Scotland, HSBC and Citigroup, selling them equity stakes of up to 20 per cent, often at only a small premium to their book value. Among foreign financial services companies, expectations were high that China's similarly stricken brokerage houses would soon be allowed to follow suit.
Now the boot is firmly on the other foot. Today, mainland banks are no longer desperate to sell chunks of their equity to foreigners. Just last week, Shenzhen Development Bank walked away from a long-standing deal to sell a 5 per cent stake to General Electric of the United States on the grounds that the price agreed two years ago is now far too low. Earlier this year an agreement between Bank of Chongqing and a US private equity firm fell through for similar reasons.
Far from searching for capital-rich saviours from abroad, today mainland banks are hunting for overseas acquisitions of their own. Last week, in the mother of all such deals so far, Industrial and Commercial Bank of China spent US$5.6 billion to buy a 20 per cent slice of South Africa's Standard Bank.
The ICBC-Standard transaction is the biggest outward investment by a Chinese bank, but it was not the first. Earlier this month, China Minsheng Bank bought 10 per cent of San Francisco-based UCBH Holdings for more than US$200 million. Last week, mainland brokerage company Citic Securities spent US$1 billion to buy 6 per cent of troubled Wall Street investment bank Bear Stearns. Nor will ICBC's purchase be the last such deal. Last week, Bank of China said it was on the look-out for potential acquisitions in Europe.
The remarkable turnaround in the fortunes of the country's banking sector owes a great deal to the power of international and mainland stock markets. Recapitalised by international and domestic stock offerings, mainland banks are far stronger today than two years ago, and very cash-rich. Its H-share offering in Hong Kong in October last year, for example, left ICBC sitting on a foreign currency cash pile worth some US$15 billion.
Even so, the first foreign purchases by Chinese banks looked relatively small and cautious. In recent months, however, mainland banks have gained in confidence, in large part as a result of the massive bull market in the domestic A-share stock markets.
The rapid rise in A-share prices has heavily bumped mainland banks' profits from fee-earning activities like asset management and custodial services. On top of that, the wealth effect created by buoyant equity markets has encouraged individuals and corporations alike to borrow more. For example, ICBC's mortgage business has grown 20 per cent this year, contributing to a 76 per cent year-on-year rise in third-quarter earnings.
And mainland banks' own share prices have benefited mightily from the bull market. ICBC's A shares are up 140 per cent from their offering price a year ago. That gives it a market capitalisation of nearly 2.5 trillion yuan, the largest in the world.
To put that into perspective, it means ICBC is now worth 50 per cent more than HSBC. That is a sobering thought, considering that at the end of last year ICBC had only around half the assets of HSBC. Even considering HSBC's exposure to the US subprime mortgage market, there can be few analysts or investors who believe that ICBC's assets are really that much better quality than those of the venerable London-based giant.
To Michael Pettis, professor of finance at Peking University, the frenzy surrounding Chinese banks brings back some uneasy memories. To him it recalls the bubble that followed the privatisation of Mexico's bad loan-burdened state-owned commercial banks in the early 1990s. He remembers how, following its listing, stock in Mexico's largest bank Banamex soared, giving it a price to book ratio double that of US giant Citibank.
It could not last. Buffeted by the successive shocks of the Tequila crisis and the Asian financial crisis, shares in Banamex collapsed. In 2001 it was taken over by Citibank.
ICBC is unlikely to suffer exactly the same fate. Even so, the Mexican example serves as a salutary reminder that while the position of mainland banks has been turned around in the last two years, it could well be reversed once again in the future.
