Merchants Bank eyes Visa stake through IPO subscription

PUBLISHED : Monday, 04 February, 2008, 12:00am
UPDATED : Monday, 04 February, 2008, 12:00am

China Merchants Bank, the mainland's seventh-largest bank by assets, plans to take a small stake in Visa by buying shares in the United States credit card company's forthcoming US$10 billion initial public offering, according to market sources.

'It'll be a few per cent of [the offering],' said a source close to the bank. 'Visa asked if they wanted to take some shares, but not as a joint venture or strategic stake - just as a relationship-building type move.'

A spokesman for Merchants Bank said he was not aware of the matter, while Visa declined to comment.

Visa is the largest credit card company in the US, followed by MasterCard. It filed an application to sell shares with the US Securities and Exchange Commission in November last year.

At an expected US$10 billion, the deal scheduled for later this year would be the second-largest initial public offering in US history since AT&T Wireless Group's stock offer that raised US$10.6 billion in April 2000 at the peak of the dotcom boom.

Bank of America, Citigroup, Goldman Sachs, JP Morgan, HSBC, Merrill Lynch, UBS and Wachovia Securities are arranging the offering.

Merchants Bank has built a strong mainland credit card business with a 33 per cent share of a 50 million card market, relatively larger given its size than its far bigger state-owned peers such as Industrial and Commercial Bank of China and China Construction Bank.

'China Merchants is a small bank, so it's flexible and less burdened by bureaucracy. It's also very young with a market-oriented management that is willing to accept new things,' said Kim Eng Securities' banking analyst Ivan Li.

'The other banks are now commercial banks but they were simply government-owned note-printing machines that can't change overnight.'

Merchants Bank reported the highest earnings' growth of all mainland banks in the first nine months of last year, when net profit rose 128 per cent to 3.9 billion yuan.

Global stock markets have had a volatile time since the new year started because of uncertainty over the strength of the US economy. The Standard & Poor's 500 Index is down 7.67 per cent year to date, while the Nasdaq Composite Index has fallen 11.43 per cent.

Should the Visa offering proceed, it will face a difficult market as US consumers are expected to pull back from spending in the cloudy economic environment. The US economy grew 0.6 per cent in the fourth quarter, significantly slower than the 4.9 per cent in the previous quarter, government data shows.

Consumer spending, which accounts for more than 60 per cent of the US economy, grew a lacklustre 2 per cent.

However, if US consumers find themselves in trouble with credit bills, Visa will not suffer as it earns income from fees taken from each transaction using one of its cards. The banks that issue the cards are responsible for collecting outstanding debt.

Smaller rival MasterCard raised US$2.4 billion from an initial public offering in May 2006. Its shares have fallen 12.17 per cent to US$189 each, but that is still almost five times their issue price.

Payments totalling US$3.34 trillion were made on the 1.4 billion Visa cards in circulation in the year to last March.