Citi looking to sell Guangfa bank stake, while Value Partners exits China joint venture

Foreign financials are streamlining their China presence against backdrop of slowing economy and capital markets reform

PUBLISHED : Friday, 23 October, 2015, 2:51pm
UPDATED : Friday, 23 October, 2015, 6:15pm

US banking giant Citi is seeking buyers for its 20 per cent stake in Guangzhou-based Guangfa Bank, while Hong Kong fund manager Value Partners has announced it has exited the 49 per cent stake in its China joint venture Golden Capital Fund Management with a sale to Yunnan Jiutian Investment Enterprises Ltd for 45 million yuan.

Both brands are seeking to streamline their China portfolio and focus on organic growth derived from their own-branded business which have performed strongly against the sagging growth provided by the China strategic holdings.

As capital markets liberalisation in China has stiffened competition, pushing up funding costs and making it difficult for foreign shareholders to rationalise and derive business synergy from such previous strategic holdings.

“Citi no longer needs Guangfa,” an analyst who has followed the industry said, adding the bank’s operations in the mainland “has seen such robust growth organically.”

Citi China...has seen its own revenue expand at a double digit pace

Guangfa’s other majority shareholders Citic Trust and China Life will be the main contenders to take over Citi’s stake, the Wall Street Journal first reported on Friday. The deal has been confirmed by other sources familiar with the matter.

The majority 80 per cent of Guangfa is currently controlled between Citi, Citic, China Life and Yingda International Holding Group, a subsdiary of the State Grid Corporation of China. Each shareholder currently owns a 20 per cent stake in the struggling city bank.

When Citi first entered as a strategic shareholder in 2006, the stake in Guangfa was valued at US$620 million. The valuation of the stake is not available at this time. A Citi spokesperson declined to comment.

Sources said Citi has performed well on its own in recent years. Citi China, in comparison, has seen its own revenue expand at a double digit pace. Citi’s main focus has been in the corporate and investment banking, consumer banking and wealth management businesses. All provided double digit growth to Citi’s balance sheets.

In previous reports, Citi execs said the bank is less well positioned to compete with domestic banks to provide yuan funding in courting businesses from state-owned enterprises. Rather, it is focused on competences in helping Chinese enterprises and multi-nationals access cross-border capital and global banking services out of Citi’s China desk network, which is a more dominant strategy.

Citi has ranked well on league tables, consistently scoring deals for its M&A, IPO, and G3 bonds issuance. It has been advising the likes of ICBC, CNOOC and China Development Bank in cross-border businesses. The bank has also trumped foreign competition - it is the only foreign bank to date allowed to issue its own-branded credit cards in China.

Guangfa, on the other hand, has seen its return on asset steadily worsen over the past three financial years under interest rate reforms and domestic liquidity distress. The figure had thinned to 0.77 per cent in 2014 from 1.08 per cent in 2012. It had twice needed to raise funds to bolster capital adequacy over the past 12 months. In June, it had issued bonds at a relative high yield of over 5 per cent in order to tap 15 billion yuan.

Citi China’s operating revenue hit 5.51 billion yuan in 2014, up 27 per cent from the previous year. Net profit was up 66 per cent, amounting to 1.6 billion yuan. In total, the revenues Citi has derived out of China exceeded US$1 billion. The China business is the most profitable market for Citi globally.

Separately, the announced valuation for Golden Capital means Value Partners will suffer a net loss of 33.8 million yuan from the sale.

Value Partners bought out the stake from Belgium manager KBC Financials in 2012. The joint venture has operated independently from Value Partners’ Hong Kong team since the acquisition. Value Partners will focus on its independent research team which has operated for a decade in China out of Shanghai and raise funds via its newly acquired Qualified Domestic Limited Partners licence, which allows it a US$100 million initial quota to bring funds to external markets, via its WFOE setup after the sale. Its A-share investments will be run out of its Hong Kong office.

“China is a strategic component of Value Partners’ business plan. In view of the evolving changes in

China’s asset management industry, we have been constantly reviewing our expansion strategy in China to capture opportunities arisen from new policies and relaxations,” said Timothy Tse, CEO of Value Partners.

“With China’s pledge to allow foreign fund managers tapping its private fund market via WFOEs [wholly foreign-owned enterprises] in the future, running a WFOE structure has become one of the top priorities which will facilitate the launch of our own-branded funds in China.”