Mainland lender is planning to acquire a consumer finance firm for about US$2b Bank of China, the nation's second-largest bank, hopes to break into the United States market by buying a consumer finance firm for about US$2 billion, according to people familiar with the bank's strategy. The bank, whose primary focus is on foreign exchange and trade finance, has only just begun to survey possible takeover targets. 'They're trying to identify possible targets but no discussions have begun,' said one source. Morgan Stanley's Discover Card business is on the block but at an estimated US$10 billion or more, which is probably too high for BOC. 'Their comfort level is around US$2 billion,' said a person familiar with the bank's strategy. BOC spokesman Wang Zhaowen could not be reached for comment. The US sub-prime lending market is an area where even global giants can stumble. HSBC earlier this month said its third-quarter revenue growth slowed as bad loans at its US unit rose. HSBC, the largest bank in Europe, acquired Household Finance Corp, a personal finance firm that lends to risky borrowers, for US$14 billion in 2003. Over-leveraged US consumers are beginning to feel the pain of higher interest rates which are expected to curb their appetite for further borrowing. That makes BOC's interest in the sector appear somewhat curious. Any attempt by a Chinese institution - especially one controlled by the central government - to take over a US financial company would be vulnerable to political attacks. It could easily degenerate into the kind of controversy that scuttled oil company CNOOC's efforts to buy US producer Unocal Corp in 2005. People familiar with the bank's growth strategy said it hoped to use the technology and know-how it would gain from an overseas acquisition to help it expand in China. Royal Bank of Scotland, Britain's second-largest bank, bought a 10 per cent stake in BOC for US$3.1 billion before BOC's initial public offering last year. 'Royal Bank of Scotland is very active in the US, so it's not as if they don't have access to the relevant skills and to some extent they would be competing,' said Credit Suisse bank analyst Bill Stacey. Christina Fok, an analyst at Macquarie Bank, said: 'Bank of China's business model is changing and is a bit more focused on small and medium-sized enterprise lending, the credit card portfolio is expanding and they are developing wealth management products and private banking.' As foreign banks expand in the mainland so China's banks are seeking assets abroad. China opened the banking sector to outside competition at the end of last year as required by its World Trade Organisation commitments. After China's banks launched some of the world's largest IPOs in the past two years, there should be no shortage of cash to finance foreign acquisitions. BOC raised US$11.2 billion last year while ICBC raised US$22 billion. Mainland lenders have been mentioned as possible suitors for banks in Indonesia, Korea and Hong Kong, where family-run banks including Wing Lung Bank, Chong Hing Bank and Bank of East Asia look appealing. The problem is the family-owned banks are not necessarily keen to sell and even if they were, they probably would demand a price so high that it would be hard for BOC to earn an adequate return on its investment. If the remaining independent banks do sell, one banker speculated, 'they'll go in the 3.5 to four times book value range'. The most expensive bank deal in Hong Kong's history is the 3.2 times book value that Singapore's DBS Bank paid for Dao Heng Bank in 2001. China Construction Bank, the mainland's third-largest bank, spent US$1.24 billion to buy the Hong Kong and Macau business of Bank of America which had taken a 9 per cent stake in CCB prior to its US$9 billion IPO. BOC had 600 overseas outlets in 27 countries at the end of August. ICBC maintains just over 100 outlets overseas. 'What the banks are trying to do is build a more international presence to support Chinese clients operating offshore,' Mr Stacey said. Making foreign deals now will help to ready the mainland banks for the day when the yuan becomes fully convertible. 'When the renminbi becomes viable they will be players and want to support their position. It's a fairly conventional approach to international banking,' he said.