Sunday, January 07, 2007

Scotiabank Likely to Invest in Dalian City Bank

SinoCast, 7 January 2007

Dalian City Commercial Bank, the largest city lender in northeastern China, is expected to bring in foreign investors in late February of 2007, said sources.

Canada's Scotiabank, who has invested in Northwest China's Xi'an City Commercial Bank, is most probably to become the strategic investor in the Dalian bank.

Dalian city bank, located in northern Bohai Sea rim region, sets aside about 25% stake for its foreign investors - 20% for strategic investor and 5% for financial investor. China now limits foreign ownership of a local bank to 25 percent.

It has talked with the Canadian bank and Banca Intesa SPA, an Italian lender. But the spokesman of Banca Intesa SPA denied Tuesday that it had in-depth negotiation with Dalian city bank. Scotiabank is believed to be the one who reportedly has entered into a letter of intent to invest in the Dalian lender. Dalian city bank declined to disclose any information on the intended investor. The deal will possibly be sealed before the end of the first quarter of 2007.

International Finance Corporation is likely to participate in Dalian city bank as a financial investor. The private equity arm of World Bank Group has purchased about 5 percent shares in some Chinese city banks such as Xi'an city bank, Nanjing city bank and Bank of Beijing. IFC principally provides technical assistance to these banks and tends to withdraw at an appropriate time.

Dalian city bank, from 2005, started to expand its capital base and to displace billions of bad assets. Its capital base has been enlarged to more than CNY 2 billion from CNY 500 million. To raise its capital adequacy ratio to the minimum requirement 8%, it replenished the capital base from CNY 2 billion to over CNY 3 billion at the end of 2006 by raising about CNY 1 billion from some domestic investors.

It is calculated that the 20% stake to be sold to strategic investor will cost over CNY 500 million or so. Chinese city banks are actively attracting foreign investment as encouraged by the banking regulator. Foreign investments can help them replenish capital strength, but also foreign investors will provide expertise to improve their corporate governance as well as sharpen their competitive edge while confronting stiffer competition in the domestic financial sector that has been fully opened up since last December. For instance, Bank of Shanghai has introduced HSBC, Bank of Beijing and ING Groep N.V. paired in March 2005, and Tianjin city bank has brought in Australia & New Zealand Banking Group Ltd.

While it is a trend for foreign banking giants, like HSBC and Citigroup, to take dual approaches to entering the Chinese market, expanding their own branch networks while also investing in local banks, Those small-sized foreign banks usually partnership with good players in China, as they are restricted by the number of outlets in China, making it hard for them to penetrate into the Chinese banking sector even if they open branches or legal-person banks. (USD 1 = CNY 7.8)