Thursday, August 28, 2008

Scotiabank Sets-up Fund Manager with Chinese Bank

Financial Post, Duncan Mavin, 28 August 2008

Bank of Nova Scotia is joining forces with a Chinese bank to launch a new fund manager, marking the Canadian bank's first foray into China's burgeoning wealth-management industry.

Scotiabank was named yesterday by Bank of Beijing as its partner in a planned joint venture in documents filed to the Shanghai Stock Exchange.

The Canadian bank has agreed to take a 33% stake, valued at about US$15-million, in a China-based joint venture that, pending regulatory approval, will be called Bank of Beijing Scotiabank Asset Management Co. Ltd. The firm will design and market a wide variety of mutual funds to retail and institutional customers through the Bank of Beijing's growing national branch network.

"This is an exciting opportunity for Scotiabank to grow our operations in China by partnering with one of China's leading banks," Rob Pitfield, executive vice-president, international banking, said in a statement.

China's fund-management industry is forecast to expand at an annual rate of 25% over the next few years, reaching US$1.4-trillion of assets under management by 2016, according to consultants McKinsey & Co.

Some local fund managers have been battered by steeply declining stock prices of late -- the Shanghai composite index has lost almost two-thirds of its value since peaking last October. That makes Scotiabank's timing pertinent, said Peter Alexander, head of Shanghai-based fund management consultancy Z-Ben Advisors.

"In China, when the timing looks a bit trying, that's the best time to get in," Mr. Alexander said. The Chinese fund-management industry will suffer fluctuating fortunes as it develops but in the long term China's demographics and rising wealth will support significant growth, he added.

Sino-foreign fund-management joint ventures were first authorized by China's regulators six years ago. They now account for half of the China's 60 fund-management firms, and include Fullgoal Fund Management Co. Ltd,, in which Scotiabank's domestic rival Bank of Montreal is a minority partner.

Almost all of the sino-foreign joint ventures are successful, said Mr. Alexander, even though they usually run into problems at some stage either because the shareholders fall out or because of operational difficulties. "It's the nature of the joint-venture beast," Mr. Alexander added.

Scotiabank, which has made no secret of its attempts to beef up its Canadian wealth-management capabilities, already has a small stake in China's financial-services industry, including an investment in a bank in Xi'an, in western China. The Canadian bank has also been trying for several years to negotiate a position in the Bank of Dalian in northeast China; so far Scotiabank has succeeded in signing a "strategic cooperation memorandum" with the Bank of Dalian, outlining the Canadian bank's intention to "explore a strategic partnership by way of a minority investment."

The bank's fund-management joint venture with Bank of Beijing could also face some challenging regulatory hurdles. It is too early to tell when the fund manager will be operational and when the first fund may be launched, said a source close to the negotiations between the two banks. The joint venture has yet to be given approval by regulators, the source added. Chinese rules do not explicitly permit banks from setting up fund-management joint ventures, though a handful of banks have been given special dispensation to do so.

Bank of Beijing is a city commercial bank -- one of the 114 smaller city-based banks in China's multi-layered banking industry -- operating mostly in the Chinese capital, as well as nearby Tianjin and also Shanghai. The bank, in which Dutch financial services giant ING Groep N. V. has a 16% stake, has total assets of about 363-billion yuan (US$53-billion) and is China's biggest city bank in terms of assets. Yan Zhubing, the chairman, said this week Bank of Beijing is planning to expand its branch network nationwide, according to Xinhua news.

Sources said executives of the Chinese bank have been casting around the idea of a fund-management joint venture for the past year.

In its statement to the Shanghai Stock Exchange, it said the bank's directors resolved to establish a fund-management company with registered capital of 300-million yuan (US$44-million). In addition to Scotiabank, there may be another as-yet-unnamed third partner in the joint venture, the Bank of Beijing's statement indicated.

By the Numbers:
• China's asset-management market
• 138 million investor accounts.
• $380-billion in assets under management.
• 230% compound annual growth rate over the past three years ending Dec. 31, 2007.
• 8.2 million Bank of Beijing customers hold co-branded mutual-fund products.
Source: Bank of Nova Scotia