While The Getting's Good Chinese Banks Head for the US
When Minsheng Bank started scouting for opportunities outside China's borders this summer, San Francisco's UCBH Holdings seemed like a perfect fit. UCBH, which serves Chinese-Americans, needed $205 million for an acquisition. Meanwhile, China's eighth-largest bank found a potential partner with expertise in private banking and risk management. On Oct. 8, Minsheng agreed to buy a 9.9% stake in UCBH -- marking the first such move by a Chinese bank on U.S. soil. "This is the best time to invest in American banks," says Hong Qi, an executive vice-president at Minsheng Bank. "It's cheaper."
Flush with cash from going public and from strong growth at home, Chinese banks are now eyeing the U.S. It's part of a broader push to become global titans offering a wide range of financial services. Top banks Industrial & Commercial Bank of China and China Merchants Bank applied with the Federal Reserve to open stateside branches this year but haven't been approved yet.
The subprime mess, which has crushed U.S. bank stocks, is spurring more activity. Just weeks after the Minsheng deal, Citic Securities struck a deal for a roughly 6% stake in troubled Bear Stearns for $1 billion.
This strategic shift poses a dilemma for U.S. regulators. The Fed must sign off on any transaction in which a foreign investor takes more than a 5% stake in a U.S. bank as well as approve any applications to open branches in the states. When it comes to evaluating Chinese banks, regulators are in uncharted territory. On one hand, the government is supposed to be committed to unfettered cross-border deals; the U.S. certainly agitates for them when American companies try to buy stakes in China. At the same time, Chinese banks operate in a very different regulatory environment -- one with a history of lax oversight and corruption. Some observers say that's why the U.S. has dragged its feet on letting Chinese banks set up U.S. branches.
The regulatory hurdles certainly influenced UCBH's decision. The bank originally considered deals with three Chinese financial institutions, including state-owned Ping An Insurance. In the end, UCBH executives opted to team up with Minsheng in part because the privately owned bank had limited ties to the Chinese government and therefore had the best chance of getting past the Fed. UCBH and Minsheng say they have gotten a verbal agreement from the Fed but are still awaiting final approval.
China's growing interest comes at a time when investors across the globe are snapping up U.S. banks, spurred partly by the weak dollar. In September, Toronto-Dominion Bank bought Commerce Bancorp, and Royal Bank of Canada acquired Alabama National BanCorporation. In August, Banco Bilbao Vizcaya Argentaria closed a deal to buy Compass Bank. Today, eight of the 25 largest bank-holding companies in the U.S. by total deposits are owned by foreign companies -- double five years ago.
Chinese banks are hoping to muscle their way on to that list. If they do, it will mark a dramatic change from just a few years ago. Decades of centralized economic planning had left China's state-owned banks crippled by troubled loans, corruption, and other issues. When China joined the World Trade Organization in 2001, the country moved to clean up its banks and privatize them. That prompted a flood of investment by Citigroup, Goldman Sachs, and other leading Wall Street firms hoping to cash in on China's booming economy. The Chinese, desperate to soak up knowledge, welcomed them.
Now on better footing, Chinese companies aim to create global empires that go beyond traditional banking. They first moved into other areas and countries where their existing customers did business. That's why China's third-largest bank, CCB, bought Bank of America's operations in Hong Kong and Macao last year. Now they're seeking strategic partners from whom they can gain expertise to expand their range of financial services. Minsheng executives were especially intrigued by UCBH's ability to successfully integrate ethnic Chinese and Americans on the same management team. "Chinese banks are trying to come to grips with the wider concept of banking," says Keith Pogson, head of Ernst & Young International's global financial service practice in China and Hong Kong.
And with a bull market powering their shares, Chinese banks have more clout at the negotiating table. China's three biggest banks rank among the top 20 in the world by market value, with ICBC overtaking Citigroup and Bank of America as the largest in July. China International Capital analyst Fan Yanjin estimates that for the 14 banks listed on the Shanghai exchange, the average price-to-earnings ratio is 41.3. That gives them plenty of buying power, especially compared with U.S. rivals' average of 10.6 times earnings.
Of course, just because U.S. banks are more affordable doesn't make them all a wise buy. Overseas banks that pick up U.S. businesses today could get stuck with an unexpectedly large number of bad home and other loans. That might derail the growth strategies of Chinese banks, which have spent most of the decade trying to work through their own passel of troubled loans. "In the current environment, you would have to be extremely brave or extremely stupid to buy a U.S. bank," says Pete Hahn, a fellow at City University's Cass Business School in London.
Still, the easiest and quickest way to gain a foothold in the U.S. is by partnering with local players. U.S. regulators may be nervous about approving recent applications from Chinese banks to set up branches, in part because of a 2002 scandal in which a New York branch of Bank of China improperly made loans. U.S. and Chinese regulators later fined the bank $20 million. "In the past we may have had our problems, but now the situation has completely changed," CCB Chairman Guo Shuqing told reporters at the 17th Party Congress in Beijing on Oct. 17. "Yet the U.S. has still not changed its attitude. It's unfair."
U.S. banks -- many of which want more exposure to profitable Chinese markets -- could benefit if U.S. regulators are more welcoming to China. Trade rules in China limit foreign investment in its banks to 25%. But China Banking Regulatory Commission Chairman Liu Mingkang has hinted that if his American counterparts approve the applications of Chinese banks to open U.S. branches, China may raise those caps. Says Babak Nikzad, a partner at KPMG's financial-services practice in Hong Kong: "U.S. regulators need to be consistent and see China the way they do other major countries."