The terms are being thrashed out for the 19.9 per cent interest in Bocom that may cost US$1 billion Hongkong and Shanghai Banking Corp is in talks to take a 19.9 per cent stake in the Bank of Communications (Bocom), the mainland's fifth-largest lender, but key terms of the deal remain unresolved. 'We are in discussion with this party, and terms are being negotiated,' chief executive Michael Smith told the South China Morning Post yesterday. Breaking a tradition of refusing to respond to rumours, HSBC's confirmation came after regulators in the mainland were quoted in a media report saying the deal had been completed. But Mr Smith cautioned that contrary to a report citing Li Fuan, a deputy director of the China Banking Regulatory Commission, a final agreement was not yet in place. 'Obviously we would like to move as quickly as we can and we believe it would be the intention of the other party as well - but a number of things remain to be worked through,' he said. Based on Bocom's equity of about 40.6 billion yuan, a 20 per cent stake would cost HSBC about US$1 billion, according to analysts. But the final price tag would depend on how much of that equity was extinguished to write down the mainland bank's bad loans, and whether HSBC would inject its capital into the bank before or after it is restructured. Analysts also said a further key condition to the deal would be whether HSBC's stake commanded influence over day-to-day bank management as well as an effective voice on the board. 'That is part of the negotiation,' Mr Smith said. HSBC had mapped out a strategy for expansion on the mainland based on organic growth supplemented by opportunistic acquisitions, he said. Such an opportunity had arisen with Bank of Communications. The mainland bank is undergoing a restructuring process aimed at tidying up its bad loan portfolio and finding a foreign equity partner before launching an initial public share offering. It had earlier been in talks with Standard Chartered, but the Post reported last month that these negotiations had failed, opening the door to a bid from HSBC. Mr Smith said Bocom had presented an attractive target. 'It is a good size - neither too big nor too small - and would be a very interesting opportunity.' Should the deal proceed, it will underline HSBC's position as the biggest foreign player on the mainland financial market. In its China results for last year, the group reported that it had more than doubled net profit to 324.7 million yuan and grown its customer deposits by 136 per cent to 23.4 billion yuan. The gains were driven 'mainly by business opportunities arising from strong growth in the Chinese economy and the further liberalisation of China's financial markets', according to Dicky Yip, HSBC's China chief executive. A partnership with Bocom would provide HSBC with links to more than 2,800 branches in 80 mainland cities.
