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Dah Sing, Carlyle buy into China bank

One billion yuan deal secures 24.99pc stake in Chongqing Commercial Bank

Dah Sing Banking Group, the banking arm of Dah Sing Financial Holdings, has teamed up with Carlyle Group to take a combined 24.99 per cent stake in Chongqing Commercial Bank, a medium-sized lender in the mainland, for slightly more than one billion yuan.

Under the agreement, Dah Sing will take a 17 per cent stake for 694 million yuan, while Carlyle, the world's largest private equity fund, will buy a 7.99 per cent interest from Yufu Asset Management, the mainland bank's major shareholder.

The acquisition price is at 1.87 times Chongqing Commercial's book value of last year under mainland accounting standards.

'It is the most exciting moment for us as we really step into our homeland to expand our banking business,' Dah Sing chairman David Wong Shou-yeh said.

Mr Wong said the bank had decided to invest in Chongqing Commercial because it was a good match and would benefit from the mainland's policy of developing the western part of the country.

Chongqing Commercial, which has restructured to minimise its bad loan burden, aims to list in Hong Kong next year. It had 66 branches in Chongqing, 30 billion yuan in assets and 701,000 consumer customers at the end of last year.

The mainland bank said it was expecting total assets to be 36 billion yuan this year and operating profit of more than 500 million yuan. The bad loan ratio would be less than 3 per cent, against 3.9 per cent at the end of September.

Dah Sing has a branch in Shenzhen while its parent firm owns 20 per cent of Great Wall Insurance, a joint venture in the mainland.

Dah Sing is the first medium-sized Hong Kong bank to take an equity investment in a mainland city commercial bank and will become the second-largest shareholder of the Chongqing bank after the deal, which is expected to be completed in the first quarter of next year.

Dah Sing's managing director Derek Wong Hon-hing said the bank would have three seats on the Chongqing Commercial board.

Dah Sing has a three-year lock-up period on its investment. Mr Derek Wong declined to comment on whether the bank could top up its shares to avoid a share dilution when Chongqing Commercial lists in Hong Kong.

It is also the first Carlyle investment in a Chinese bank. This year, for unspecified reasons, it quit a Citigroup-led consortium that was buying a stake in Guangdong Development Bank.

In December last year, Carlyle spent US$410 million for a 25 per cent stake in China Pacific Life Insurance, the country's third-largest life insurer, with a promise to hold the stake for three years.

It also said in October it would pay 1.8 billion yuan for 50 per cent of Xugong Construction Machinery, China's largest construction equipment maker, after reducing its interest from the proposed 85 per cent due to regulatory opposition.

'I think there will be a trend for small and medium-sized banks to buy a stake in mainland city commercial banks in the future to leverage the local banks' networks for expansion,' said Kate Lim Siu-ming, an associate director at Fitch Ratings.

Ms Lim said that as the Hong Kong banking market was mature, the investment for small and medium-sized banks to set up their local subsidiary or branch network in the mainland would be very substantial and the process very slow.

An analyst from a US investment house said the acquisition price that Dah Sing paid was fair. 'I think the impact to Dah Sing's profit will only be neutral at the initial stage,' he said.

He said there could be some long-term synergy since Dah Sing's niche was in consumer banking, which would help its mainland partner, while Chongqing could apply for a national licence.

The shares of Dah Sing Financial and Dah Sing Banking were suspended from trading yesterday.