Foreign banks again hear the call of China

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A man walks on an overpass on Jianguo Road near office buildings in Beijing's central business district in this January 6, 2009 file photo. REUTERS/Jason Lee

BEIJING (Reuters) – A clutch of Western banks that have escaped the worst of the financial crisis are seizing the opportunity to ramp up their presence in China in the hope of profiting from the sector’s rapid growth.

Deals |  China

In the wake of the worst global recession in 80 years, major banks have reined in their international ambitions to strengthen their balance sheets. Bank of America and ING are among those that have pulled in their horns in China.

But heeding the maxim that a serious crisis should never go to waste, some other players are scrambling to build on strong positions in their home markets and speed up their expansion in China.

“It is set to become a trend that dominant Western banks from the United Kingdom or the United States will have to focus on domestic issues for a relatively long time to come,” said May Yan, an analyst with Nomura International.

“And this will lead to second-tier, regional banks rushing to China, hoping to expand business,” she said.

HOLA, AMIGO

Historically, Asia-focused banks, such as HSBC, Standard Chartered and Bank of East Asia have had a strong footing in China, as has U.S. bank Citigroup Inc.

Since the global economic downturn, other lenders in Europe and North America that have traditionally focused on their home markets have joined the China pack. Spain’s two biggest banks have taken the lead in the tie-ups.

An important motive for the Spanish banks is China’s growing business ties with Latin America, a market that has long been a priority for Spanish lenders.

Analysts also singled out banks from Asian countries, such as Korea and Singapore, as well as Australia, as the ones most likely to benefit from the increasing dependence between China and their home markets.

MORE PROMISING ROUTES

While tie-ups with Chinese partners would be a shortcut, analysts reckon organic growth and local incorporation are more promising routes. Foreign banks are also limited by Chinese law to buying no more than 20 percent in a local lender.

“By incorporating locally, foreign banks would be able to do business both offshore and onshore, which is more meaningful to them,” Nomura’s Yan said.

“The bulk of their business is wholesale, so the structure would facilitate transactions across borders,” she said.

Australia and New Zealand Banking Group Ltd, one of Australia’s top four lenders, plans to open more than 20 new outlets in China by 2012 once it has won approval for local incorporation, which it expects by mid-year.

“ANZ continues to invest for growth in China and aims to be a top four foreign bank by 2012 through a combination of seeking local incorporation, expanding our branch network and opening rural branches,” said Alex Thursby, CEO Asia Pacific, Europe & America.

At present, the bank owns a 19.9 percent stake in Shanghai Rural Commercial Bank and a 20 percent stake in Bank of Tianjin, one of more than 100 city commercial banks in China.

Hana Bank, South Korea’s No. 4 lender and a unit of Hana Financial Group, was planning to buy 18.44 percent of Bank of Jilin in northern China for $316 million, the Yonhap news agency reported in September.

THE SMALLER, THE BETTER

The advantage for smaller foreign lenders of joining hands with a city commercial bank such as Bank of Jilin is that both parties will be better matched in terms of financial might and expertise.

“Foreign banks with mega size do not suit small city commercial banks as their experiences and strengths are different,” said an analyst in Beijing with GF Securities, which does not allow its analysts to be named.

Apart from taking equity stakes, more foreign banks are choosing to set up joint ventures with local partners in business segments with strong growth prospects.

Commonwealth Bank of Australia holds stakes of nearly 20 percent in two city commercial banks, but the second-largest lender in Australia is also partners with Bank of Communications, China’s No. 5 bank, in a life insurance joint venture in Shanghai.

That could be a model for other foreign banks to emulate.

“In a word — you don’t have to be the biggest, just the most suitable,” said the GF Security analyst.

(Additional reporting by Xie Heng in BEIJING, Narayanan Somasundaram in SYDNEY; Editing by Muralikumar Anantharaman)

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