Citigroup raises restrictions on foreign ownership of Chinese banks
In a maneuver to provoke the jealousy of peers, Citigroup became the first foreign bank and the second foreign investor to gain control over a Chinese lender. The consortium, led by American financial-services giant, has auctioned 24 billion yuan ($ 3 billion) for an 85% stake in Guangdong Development Bank (GDB), a medium-sized bank from China’s relatively large south. Citigroup could own 40-45% of GDP if the deal goes ahead, mocking the terms that limit a foreign investor in a Chinese bank to 20% and all foreigners to 25%.
It will be a comeback for Citigroup, which will have to sit back and watch for two years while rivals gain strategic positions in the China banking market. In June 2005, Bank of America (BOFA) defeated Citigroup by 9% in China Construction Bank (CCB), one of the four largest lenders in the country. Citigroup, which advises on CTB’s multi-billion-dollar supply, has lost its lucrative position. This time it moved faster, surpassing ABN Amro of the Netherlands and Society Generals of France for GDP. Although Newbridge Capital, a private-equity firm, was the first foreign investor to gain control of the Bank of China, its charge, Shenzhen Development Bank, was only half the size of GDP, with assets of 345 billion yuan at the end of 2004.
Citigroup, however, is paying a higher price: 2.3 times the book value, while Bofa paid 1.15 times for its CCB slice. True, buyers often pay a premium for control. But the GDP economic situation is dangerous. Its liabilities exceeded its assets by more than 35 billion yuan (state subsidies encouraged it); Its capital-efficiency ratio is lower than international standards; And its profitability is low.
In addition, Citigroup will have to rebuild another to continue this deal and at one price. In early 2003, Americans bought a 4.6% stake in Shanghai Pudong Development Bank, with insiders saying the middle-class lender was proving to be a dirty partner. Citigroup has promised not to invest in another major territory without the permission of Shanghai Pudong. It was granted, but Citigroup increased its stake in Shanghai Bank to $ 19.9 million at a cost of $ 800 million, four times the original price per share. Interestingly, Citigroup had to agree not to set up a joint-venture with GDP on credit cards, only China’s most promising financial business and Guangdong Bank were good.
However, Citigroup’s opponents will inevitably be fouled. As of last October, 22 foreign banks had spent $ 16.5 billion on 17 major land lenders, but had no real impact. Chinese officials argue that the poor state of GDP and the small size are an exception to this. And banking regulator Liu Mingkong warned last month that foreigners should be granted more than a quarter of a Bank of China bank that would then be considered foreign, among other things, in some cities subject to restrictions that only allow yuan-denominated business. However, he is now under pressure to raise hats on foreign shares. It’s HSBC’s likes, 19.9% in Bocom, a Sounder bank much larger than GDP, to gain real management control. Unfortunately, Citigroup’s rebellion can take advantage of its rivals.