THE CHALLENGE: Canada's Big Five are small fry compared with many foreign rivals
THE LESSON: Target a niche, form partnerships, take the long view -- and then proceed with caution . . .
The Globe and Mail, Sinclair Stewart, Saturday, October 29, 2005
Rick Waugh has a little story he likes to tell about China. More than four years ago, before he was promoted to chief executive officer, Bank of Nova Scotia was approached by the World Bank with a proposal: Would it like to make a co-investment in Xi'an City Commercial Bank (XCCB), a coalition of more than 40 credit unions that had recently banded together under one corporate umbrella?
Xi'an, a city of more than seven million people in the heart of the Chinese mainland, is perhaps best known for its Terracotta Warriors, a stony legion of 8,000 life-sized sculptures that have been described as the eighth wonder of the world. What it isn't known for is stellar economic growth or the maturity of its banking system -- both of which the Chinese government and the World Bank have been attempting to change.
Scotiabank agreed to contribute $3-million (U.S.) for a 2.5-per-cent stake, and then work with XCCB to improve its governance practices and upgrade its accounting to international standards.
It sounded like the ideal opportunity: a cheap, low-risk, and straightforward segue into a Chinese market that was untapped by foreign rivals. But this is China, where attempts to transform the business culture, much less introduce Western notions of corporate governance and bookkeeping, are rarely straightforward matters. As it turned out, Scotiabank didn't sign the agreement until the fall of 2002, and then had to wait another two years before the investment itself was formally consummated.
"Four years," says Mr. Waugh, unfurling the fingers of his right hand to emphasize the point. "Four years to just close the deal. The Chinese, while their intents are right, have a long way to come on accounting standards, transparency, understanding shareholders' rights -- particularly minority shareholders' rights -- because they come from a culture of central planning. They've got a long way to learn."
The hurdles in Xi'an have hardly soured Scotiabank on China. The company has been laying groundwork here for 20 years, and now boasts representative offices in Beijing and Shanghai, as well as branches in Guangzhou and Chongqing. Along with Bank of Montreal, it has been the most active of the Canadian banks in pursuing growth in the world's most populous country.
Yet amidst the current helter-skelter environment of foreign investment in China and the litany of Western banks who have laid down billion-dollar bets in the past year, Mr. Waugh comes off as a voice of caution. He sees the obvious potential but he's wary of reaching too far, too fast. His experience with Xi'an city has taught him as much.
"In China, the road is going to be a very difficult one, through potholes and what have you, and you just don't know until you get there," he said. "For us, we're not counting on any material results for the foreseeable future. It is going to take longer than we think."
Canada and China are separated by several chasms, ranging from the geographic and the linguistic to the cultural and the political -- all of which can pose serious impediments to foreign expansion. Yet these barriers are quickly dissolving in the face of enormous opportunity. The numbers alone are enough to make any banker giddy: 1.2 billion people, $1.5-trillion in personal savings, and an economy chugging along at a 9-per-cent clip. The thinking is that as the Chinese get dragged into the global economy, they will begin acquiring the same kind of spending habits as Western consumers, creating an explosion in credit card usage, mortgages and lines of credit.
This combination of demographics and cordial business relations positions China as a natural place for expansion -- albeit cautious expansion.
"We have to focus on being a niche player in a very big market," conceded Mr. Waugh. BMO shares that view. It has branch offices in Beijing, Guangzhou and Hong Kong, along with a representative office in Shanghai. Foreign exchange trading is one of its biggest businesses here, and BMO is by far the largest Western player in the game, accounting for 70 per cent of the trading volume by foreign banks.
But like Scotiabank, its ambitions are realistic, if not modest. BMO realizes it could never compete with larger Chinese or U.S. rivals in personal banking, so it has focused its retail strategy on wealth management. It has a 28-per-cent interest in Fullgoal Fund Management Co. Ltd., a Chinese mutual fund company with more than $1.5-billion in assets under management. The fund industry is still in its infancy in China, evidenced by how much of the country's savings are deposited in bank savings accounts. However, BMO predicts that as much as $300-million (Canadian) in assets could be available for management in the next five to 10 years.
Tony Comper, BMO's CEO, preaches patience, but says the notoriously complex regulatory system in China is improving and things are beginning to move more rapidly.
"Frankly, we're not as interested in any short-run [potential] as we are in building a long-haul business," he said. "For our book, as opposed to taking just a pure equity investment in one of the commercial banks, this initiative . . . looks like one that is better suited to our capabilities and our risk appetite. The hallmark of the BMO approach to markets like this, and markets anywhere else, is a measured pace."
These banks may be moving with caution, but at least they're moving. The rest of the Canadian banks appear impervious to the China boom, and any steps they have taken to penetrate the mainland have been comparatively minor.
This shouldn't come as a complete surprise. BMO and Scotiabank have spent decades cultivating relationships with Chinese officials. More importantly, however, they can lay claim to proven growth strategies (Scotiabank in Mexico and the Caribbean, BMO in the U.S. Midwest).
This last point can't be overstated. Canadian Imperial Bank of Commerce, for instance, has made costly stumbles in the United States, both with its failed electronic retail bank and its accident-prone investment bank. Royal Bank of Canada has had growing pains recently in the U.S. Southeast, and while they have been less spectacular than those suffered by CIBC, they are serious enough to give the markets pause.
CIBC has a token presence in China, including representative offices in Beijing and Shanghai. However, it has essentially chosen to outsource its Chinese banking capabilities through a "business co-operation agreement" it struck recently with Bank of East Asia. The Hong Kong bank will provide CIBC clients with trade financing services and local currency accounts in China, but the Canadian bank will not receive revenue from the venture. RBC, meanwhile, has a representative office in Beijing.
That leaves Toronto-Dominion Bank, which has also resisted the urge to join the masses descending on China. Ed Clark has steered clear of China, instead devoting his two years as CEO to the U.S. retail market, first buying Portland, Me.-based Banknorth Group Inc., and then pulling off a merger of his discount brokerage operation, TD Waterhouse USA, with rival Ameritrade Holding Corp.
"Should we be sitting there and trying to get into China today?" he asked in a recent interview. "We came to the conclusion that what you have to do is what you're good at. You have to make money the way you know how to make money. So because of this historical legacy, Scotiabank has built a culture that is comfortable working in different cultures around the world. I'd rather make money for my shareholders doing what I [know how to do] than taking a shot at something I don't know how to do. Because it might be twice the rate of return, but I also could lose my shirt."
Maybe the cautious types are right. Maybe China is too raw and unwieldy, its reforms progressing too slowly, to justify anything more than a prudent, systematic approach to growth -- if anything at all. Maybe it's too risky to place a big bet on a banking system that is riven by bad loans and encrusted with bureaucratic management. But if these people are right, then a hell of a lot of high-powered bankers could be wrong.
The Chinese banking market has become the focal point of an unprecedented gold rush in the past year and a half, and Canadian banks are nowhere to be seen.
Witness the string of recent deals: HSBC shelled out $2.25-billion (U.S.) in late 2004 for a 20-per-cent stake in Bank of Communications; Bank of America then paid $3-billion for a minority stake in China Construction Bank; Royal Bank of Scotland, backed by some other investors, acquired 10 per cent of Bank of China for $3.1-billion; Semasek, a Singaporean conglomerate, also anted up $3.1-billion for a 10-per-cent stake in Bank of China, and committed another $2.5-billion for a slice of China Construction Bank. Even investment bankers are getting in on the act. This summer, Goldman Sachs said it would buy 10 per cent of Industrial and Commercial Bank of China for $3-billion, and UBS recently agreed to pay $500-million for less than 2 per cent of this bank.
Say goodbye to patience. The story here is one of mutual back-scratching: The Chinese banks, which are preparing for competition on the world stage when the country fully opens it doors to foreigners at the end of 2006, get exposure to best practices and management expertise, not to mention a much-needed dose of cash. The Western banks get access to huge distribution channels, which they can use to market their products to hundreds of millions of customers. They may also earn some lucrative fees for advising these Chinese banks when they begin launching initial public offerings on the stock market later this year.
Until recently, the 200 foreign banks operating in China controlled just 1 per cent of the country's $4-trillion banking system, according to UBS. However, if the deals continue at the current pace, this number could rise to 17 per cent in the next two years. A foreign bank can own up to 20 per cent of a Chinese bank, while a group of outside investors can own a maximum of 25 per cent combined.
Mind you, there are plenty of detractors. Chinese banks are legendarily opaque, and when they do offer a glimpse of their books, it's rarely pretty. The loan problems experienced by Canadian banks a few years ago barely register alongside the dysfunctional lending practices of their Chinese peers. So far, the Beijing government has paid a staggering $280-billion to bail out its banks since 1998, and will have to inject another $200-billion before the job is done, according to a report last month by the Organization for Economic Co-operation and Development. That is more than 30 per cent of China's GDP for 2004.
Jonathan Anderson, the chief Asian economist for UBS, believes the real story lies somewhere between the fear-mongers and the unfettered optimists. His argument is that, despite being an emerging market, China is a country that is severely overbanked. According to his calculations, commercial bank deposits account for nearly 200 per cent of the country's gross domestic product, while loans stand at roughly 130 per cent of GDP, both far in excess of banks in developed countries. Opportunities and risks still exist, he admits, but not nearly to the degree to which many believe.
"The truth of the matter is that China's financial system is neither an explosive minefield nor a beckoning gold mine," he wrote in a recent article, "but rather a profoundly middle-of-the-road investment option."
Five banks, five strategies
Bank of Montreal
Bank of Montreal's roots in China date back to the late 19th century, and today the bank remains one of the most expansive Canadian financial institutions on the mainland. BMO has branches in the capital of Beijing, as well as in Guangzhou and Hong Kong, and also boasts a representative office in Shanghai, China commercial centre. The bank is pursuing the retail market through its 28-per-cent stake in Fullgoal Fund Management Company Ltd., a mutual fund joint venture with a few Chinese partners. This summer, BMO became the first Canadian bank to be granted a licence to offer local currency services in China.
Canadian Imperial Bank of Commerce
CIBC has representative offices in Beijing and Shanghai, and once had a merchant banking partnership in Hong Kong with billionaire Li Ka-shing, Mr. Li sold his holdings in CIBC last year, however, and the two sides began dissolving their merchant bank. CIBC has been curtailing foreign expansion after experiencing troubles in the U.S., and China is no exception. Rather than undertake a more aggressive growth plan, CIBC struck a recent co-operation agreement with Bank of East Asia. The deal will allow CIBC customers to access Chinese trade financing and open local currency accounts through Hong Kong-based BEA.
Toronto-Dominion Bank
TD boss Ed Clark says he has no interest in chasing the Chinese dragon, and is instead focusing his external growth ambitions on the U.S. market. Through its TD Waterhouse brokerage, TD once had a small presence in Hong Kong, but that has since been shuttered. The bank has no beachheads on the mainland.
Royal Bank of Canada
RBC, Canada's largest bank, is one of the smallest in terms of its Chinese presence. The bank has capital markets operations in mainland China through its sole representative office in Beijing. RBC has applied to open a branch in the capital, and says it is committed t expanding its business with both government and financial services companies.
Bank of Nova Scotia
Along with BMO, Bank of Nova Scotia has the most entrenched Chinese presence of Canada's Big Five banks. Scotiabank, which has a reputation as the most international player in the Canadian banking sector, has representative offices in both Beijing and Shanghai, and has branches in the populous cities of Guangzhou and Chongqing. It recently partnered with International Financial Corp., a division of the World Bank, to acquire the small equity stake in Xi'an City Commercial Bank. Many American banks have attempted to crack the retail market this way, but this was the first time a Canadian bank made a director investment in one of its Chinese counterparts.
;
THE LESSON: Target a niche, form partnerships, take the long view -- and then proceed with caution . . .
The Globe and Mail, Sinclair Stewart, Saturday, October 29, 2005
Rick Waugh has a little story he likes to tell about China. More than four years ago, before he was promoted to chief executive officer, Bank of Nova Scotia was approached by the World Bank with a proposal: Would it like to make a co-investment in Xi'an City Commercial Bank (XCCB), a coalition of more than 40 credit unions that had recently banded together under one corporate umbrella?
Xi'an, a city of more than seven million people in the heart of the Chinese mainland, is perhaps best known for its Terracotta Warriors, a stony legion of 8,000 life-sized sculptures that have been described as the eighth wonder of the world. What it isn't known for is stellar economic growth or the maturity of its banking system -- both of which the Chinese government and the World Bank have been attempting to change.
Scotiabank agreed to contribute $3-million (U.S.) for a 2.5-per-cent stake, and then work with XCCB to improve its governance practices and upgrade its accounting to international standards.
It sounded like the ideal opportunity: a cheap, low-risk, and straightforward segue into a Chinese market that was untapped by foreign rivals. But this is China, where attempts to transform the business culture, much less introduce Western notions of corporate governance and bookkeeping, are rarely straightforward matters. As it turned out, Scotiabank didn't sign the agreement until the fall of 2002, and then had to wait another two years before the investment itself was formally consummated.
"Four years," says Mr. Waugh, unfurling the fingers of his right hand to emphasize the point. "Four years to just close the deal. The Chinese, while their intents are right, have a long way to come on accounting standards, transparency, understanding shareholders' rights -- particularly minority shareholders' rights -- because they come from a culture of central planning. They've got a long way to learn."
The hurdles in Xi'an have hardly soured Scotiabank on China. The company has been laying groundwork here for 20 years, and now boasts representative offices in Beijing and Shanghai, as well as branches in Guangzhou and Chongqing. Along with Bank of Montreal, it has been the most active of the Canadian banks in pursuing growth in the world's most populous country.
Yet amidst the current helter-skelter environment of foreign investment in China and the litany of Western banks who have laid down billion-dollar bets in the past year, Mr. Waugh comes off as a voice of caution. He sees the obvious potential but he's wary of reaching too far, too fast. His experience with Xi'an city has taught him as much.
"In China, the road is going to be a very difficult one, through potholes and what have you, and you just don't know until you get there," he said. "For us, we're not counting on any material results for the foreseeable future. It is going to take longer than we think."
Canada and China are separated by several chasms, ranging from the geographic and the linguistic to the cultural and the political -- all of which can pose serious impediments to foreign expansion. Yet these barriers are quickly dissolving in the face of enormous opportunity. The numbers alone are enough to make any banker giddy: 1.2 billion people, $1.5-trillion in personal savings, and an economy chugging along at a 9-per-cent clip. The thinking is that as the Chinese get dragged into the global economy, they will begin acquiring the same kind of spending habits as Western consumers, creating an explosion in credit card usage, mortgages and lines of credit.
This combination of demographics and cordial business relations positions China as a natural place for expansion -- albeit cautious expansion.
"We have to focus on being a niche player in a very big market," conceded Mr. Waugh. BMO shares that view. It has branch offices in Beijing, Guangzhou and Hong Kong, along with a representative office in Shanghai. Foreign exchange trading is one of its biggest businesses here, and BMO is by far the largest Western player in the game, accounting for 70 per cent of the trading volume by foreign banks.
But like Scotiabank, its ambitions are realistic, if not modest. BMO realizes it could never compete with larger Chinese or U.S. rivals in personal banking, so it has focused its retail strategy on wealth management. It has a 28-per-cent interest in Fullgoal Fund Management Co. Ltd., a Chinese mutual fund company with more than $1.5-billion in assets under management. The fund industry is still in its infancy in China, evidenced by how much of the country's savings are deposited in bank savings accounts. However, BMO predicts that as much as $300-million (Canadian) in assets could be available for management in the next five to 10 years.
Tony Comper, BMO's CEO, preaches patience, but says the notoriously complex regulatory system in China is improving and things are beginning to move more rapidly.
"Frankly, we're not as interested in any short-run [potential] as we are in building a long-haul business," he said. "For our book, as opposed to taking just a pure equity investment in one of the commercial banks, this initiative . . . looks like one that is better suited to our capabilities and our risk appetite. The hallmark of the BMO approach to markets like this, and markets anywhere else, is a measured pace."
These banks may be moving with caution, but at least they're moving. The rest of the Canadian banks appear impervious to the China boom, and any steps they have taken to penetrate the mainland have been comparatively minor.
This shouldn't come as a complete surprise. BMO and Scotiabank have spent decades cultivating relationships with Chinese officials. More importantly, however, they can lay claim to proven growth strategies (Scotiabank in Mexico and the Caribbean, BMO in the U.S. Midwest).
This last point can't be overstated. Canadian Imperial Bank of Commerce, for instance, has made costly stumbles in the United States, both with its failed electronic retail bank and its accident-prone investment bank. Royal Bank of Canada has had growing pains recently in the U.S. Southeast, and while they have been less spectacular than those suffered by CIBC, they are serious enough to give the markets pause.
CIBC has a token presence in China, including representative offices in Beijing and Shanghai. However, it has essentially chosen to outsource its Chinese banking capabilities through a "business co-operation agreement" it struck recently with Bank of East Asia. The Hong Kong bank will provide CIBC clients with trade financing services and local currency accounts in China, but the Canadian bank will not receive revenue from the venture. RBC, meanwhile, has a representative office in Beijing.
That leaves Toronto-Dominion Bank, which has also resisted the urge to join the masses descending on China. Ed Clark has steered clear of China, instead devoting his two years as CEO to the U.S. retail market, first buying Portland, Me.-based Banknorth Group Inc., and then pulling off a merger of his discount brokerage operation, TD Waterhouse USA, with rival Ameritrade Holding Corp.
"Should we be sitting there and trying to get into China today?" he asked in a recent interview. "We came to the conclusion that what you have to do is what you're good at. You have to make money the way you know how to make money. So because of this historical legacy, Scotiabank has built a culture that is comfortable working in different cultures around the world. I'd rather make money for my shareholders doing what I [know how to do] than taking a shot at something I don't know how to do. Because it might be twice the rate of return, but I also could lose my shirt."
Maybe the cautious types are right. Maybe China is too raw and unwieldy, its reforms progressing too slowly, to justify anything more than a prudent, systematic approach to growth -- if anything at all. Maybe it's too risky to place a big bet on a banking system that is riven by bad loans and encrusted with bureaucratic management. But if these people are right, then a hell of a lot of high-powered bankers could be wrong.
The Chinese banking market has become the focal point of an unprecedented gold rush in the past year and a half, and Canadian banks are nowhere to be seen.
Witness the string of recent deals: HSBC shelled out $2.25-billion (U.S.) in late 2004 for a 20-per-cent stake in Bank of Communications; Bank of America then paid $3-billion for a minority stake in China Construction Bank; Royal Bank of Scotland, backed by some other investors, acquired 10 per cent of Bank of China for $3.1-billion; Semasek, a Singaporean conglomerate, also anted up $3.1-billion for a 10-per-cent stake in Bank of China, and committed another $2.5-billion for a slice of China Construction Bank. Even investment bankers are getting in on the act. This summer, Goldman Sachs said it would buy 10 per cent of Industrial and Commercial Bank of China for $3-billion, and UBS recently agreed to pay $500-million for less than 2 per cent of this bank.
Say goodbye to patience. The story here is one of mutual back-scratching: The Chinese banks, which are preparing for competition on the world stage when the country fully opens it doors to foreigners at the end of 2006, get exposure to best practices and management expertise, not to mention a much-needed dose of cash. The Western banks get access to huge distribution channels, which they can use to market their products to hundreds of millions of customers. They may also earn some lucrative fees for advising these Chinese banks when they begin launching initial public offerings on the stock market later this year.
Until recently, the 200 foreign banks operating in China controlled just 1 per cent of the country's $4-trillion banking system, according to UBS. However, if the deals continue at the current pace, this number could rise to 17 per cent in the next two years. A foreign bank can own up to 20 per cent of a Chinese bank, while a group of outside investors can own a maximum of 25 per cent combined.
Mind you, there are plenty of detractors. Chinese banks are legendarily opaque, and when they do offer a glimpse of their books, it's rarely pretty. The loan problems experienced by Canadian banks a few years ago barely register alongside the dysfunctional lending practices of their Chinese peers. So far, the Beijing government has paid a staggering $280-billion to bail out its banks since 1998, and will have to inject another $200-billion before the job is done, according to a report last month by the Organization for Economic Co-operation and Development. That is more than 30 per cent of China's GDP for 2004.
Jonathan Anderson, the chief Asian economist for UBS, believes the real story lies somewhere between the fear-mongers and the unfettered optimists. His argument is that, despite being an emerging market, China is a country that is severely overbanked. According to his calculations, commercial bank deposits account for nearly 200 per cent of the country's gross domestic product, while loans stand at roughly 130 per cent of GDP, both far in excess of banks in developed countries. Opportunities and risks still exist, he admits, but not nearly to the degree to which many believe.
"The truth of the matter is that China's financial system is neither an explosive minefield nor a beckoning gold mine," he wrote in a recent article, "but rather a profoundly middle-of-the-road investment option."
Five banks, five strategies
Bank of Montreal
Bank of Montreal's roots in China date back to the late 19th century, and today the bank remains one of the most expansive Canadian financial institutions on the mainland. BMO has branches in the capital of Beijing, as well as in Guangzhou and Hong Kong, and also boasts a representative office in Shanghai, China commercial centre. The bank is pursuing the retail market through its 28-per-cent stake in Fullgoal Fund Management Company Ltd., a mutual fund joint venture with a few Chinese partners. This summer, BMO became the first Canadian bank to be granted a licence to offer local currency services in China.
Canadian Imperial Bank of Commerce
CIBC has representative offices in Beijing and Shanghai, and once had a merchant banking partnership in Hong Kong with billionaire Li Ka-shing, Mr. Li sold his holdings in CIBC last year, however, and the two sides began dissolving their merchant bank. CIBC has been curtailing foreign expansion after experiencing troubles in the U.S., and China is no exception. Rather than undertake a more aggressive growth plan, CIBC struck a recent co-operation agreement with Bank of East Asia. The deal will allow CIBC customers to access Chinese trade financing and open local currency accounts through Hong Kong-based BEA.
Toronto-Dominion Bank
TD boss Ed Clark says he has no interest in chasing the Chinese dragon, and is instead focusing his external growth ambitions on the U.S. market. Through its TD Waterhouse brokerage, TD once had a small presence in Hong Kong, but that has since been shuttered. The bank has no beachheads on the mainland.
Royal Bank of Canada
RBC, Canada's largest bank, is one of the smallest in terms of its Chinese presence. The bank has capital markets operations in mainland China through its sole representative office in Beijing. RBC has applied to open a branch in the capital, and says it is committed t expanding its business with both government and financial services companies.
Bank of Nova Scotia
Along with BMO, Bank of Nova Scotia has the most entrenched Chinese presence of Canada's Big Five banks. Scotiabank, which has a reputation as the most international player in the Canadian banking sector, has representative offices in both Beijing and Shanghai, and has branches in the populous cities of Guangzhou and Chongqing. It recently partnered with International Financial Corp., a division of the World Bank, to acquire the small equity stake in Xi'an City Commercial Bank. Many American banks have attempted to crack the retail market this way, but this was the first time a Canadian bank made a director investment in one of its Chinese counterparts.
