ICBC expands in Middle East

ICBC's latest expansion in the Middle East marks a broader international drive that could make the bank a top global player in the next 5-10 years.

PUBLISHED : Thursday, 15 November, 2012, 12:43pm
UPDATED : Monday, 27 June, 2016, 11:50am

ICBC (1398.HK; Shanghai: 601398) is easily China's most outward-looking bank, and it is showing its global aspirations once again with word that it plans to open branches in the Middle Eastern markets of Saudi Arabia and Kuwait. This latest announcement that it has received local approval to set up branches in these two lucrative markets comes just a week after ICBC said it has also received local regulatory approval to buy a controlling stake in the Argentine unit of South Africa's Standard Bank, its longtime partner in Africa.

For anyone looking at long-term banking plays in China, ICBC certainly seems like a good bet due to its strong focus on emerging markets, trade finance and yuan-related services, three big growth areas where Chinese banks enjoy a strong natural advantage over their western peers. But in the shorter term, ICBC and its other major domestic competitors will have to face more serious problems in their home market that still accounts for the big majority of their business.

China's lenders are now having to deal with a ballooning volume of bad loans as a result of liberal lending under Beijing's four trillion yuan economic stimulus package at the height of the global financial crisis in 2009 and 2010. Beijing is currently helping the banks to cope with the problem through creative strategies like letting them defer collection of loans and giving them extra leeway in the way they define bad loans. But no matter how much they try to disguise or postpone the issue, the problem still exists and will likely show up in the results of ICBC and other major state-owned lenders over the next 2-3 years.

But for investors willing to look beyond that time frame, ICBC certainly looks like my favorite choice based on its outward-looking strategy and focus on areas where it has a natural advantage over more sophisticated global rivals like Citigroup (NYSE: C) and HSBC (London: HSBA; 0005.HK).

Its opening of branches in Saudi Arabia and Kuwait will allow ICBC to expand into those markets by offering yuan settlement services for the huge amounts of oil that China buys from the region each year. Most oil buying is now done in US dollars, but both Saudi Arabia and Kuwait would almost certainly welcome some purchases using the yuan to diversify their foreign currency holdings as the dollar steadily depreciates. Chinese engineering and infrastructure-building firms are also becoming increasingly active in the Middle East, meaning ICBC's new branches can also help to serve these companies with their activities in those markets.

This Middle East expansion is just the latest move abroad for ICBC, following other recent entries into Latin American and Asia markets and even the tough North American market through a tie-up with Bank of East Asia (0023.HK), Hong Kong's leading local bank. ICBC is also becoming a major player in Africa through its tie-up with Standard Bank, the continent's largest bank.

All of these initiatives look good, though all will also take some time to produce meaningful results and I'm sure there will be some stumbles along the way. But if it can execute well on most of its overseas initiatives, which looks like a strong possibility, ICBC could well emerge as China's first truly global player in the next 5-10 years, banking on its leading position at home and experience in emerging markets and yuan-related services.

Bottom line: ICBC's latest expansion in the Middle East marks a broader international drive that could make the bank a top global player in the next 5-10 years.