31 October 2006

RBC & China Minsheng in Joint Venture

The Toronto Star, Tara Perkins, 31 October 2006

Canada's biggest bank is tip-toeing into the Chinese mutual fund market, hand-in-hand with one of China's fastest-growing banks.

The Royal Bank of Canada is teaming up with China Minsheng Banking Corp. Ltd. to create a $25 million (U.S.) fund management company.

The new joint-venture company, to be based in Shanghai, will create, manage and sell mutual funds to Chinese retail and institutional investors, using the local Chinese currency.

The Royal Bank will hold a 30 per cent stake, China Minsheng Bank will hold 60 per cent, and Three Gorges Finance Co. Ltd. will own the remainder.

George Lewis, chairman and chief executive officer of RBC Asset Management Inc., said the new fund company will give RBC an entry point into the rapidly expanding Chinese asset management market.

Chinese assets available for management could hit as much as $300 billion in as little as five years, says Ed Legzdins, president of BMO Mutual Funds.

Legzdins said he welcomes RBC's entry. "I think it's good when foreign firms go into the Chinese market and help Chinese mutual fund companies become better — or become established, as is the case with RBC — because that's going to benefit all the participants in the Chinese mutual fund industry," he said.

BMO was the first foreign firm to invest in an established fund management firm in China, picking up a 17 per cent stake in Fullgoal Fund Management Co. in 2003, and then boosting its interest to 28 per cent the next year.

Its partners in China are Haitong Securities Co. Ltd. and Shenyin & Wanguo Securities Co. Ltd.

The deal between China Minsheng and RBC had been rumoured since early this year.

Lewis yesterday said in an interview it took some time to find a third joint-venture partner, as required by regulators.

"This is a very long-term investment and initiative from our point of view, so taking the extra time to make sure we had a good fit with our partners and understood the business was important," Lewis said.

China Minsheng has 240 branches and outlets in China's major cities, ranking among the country's top 10 banks with widely held ownership.

While the joint venture with China Minsheng is not financially material to Royal Bank, it is important to the bank's overall strategy in China, Lewis added.

Banks around the world are flocking to take part in the massive economic growth China is experiencing as the government relaxes regulations over the financial services industry.

The relationships Canadian banks are establishing in China will come in handy as new opportunities present themselves, Legzdins said.

He explained that China has the highest savings rate in the world — about 40 per cent of income — building a savings pool of about $1.7 trillion.

"These are monies that are sitting in bank accounts not earning very much," he said, noting that much of the growth in Canada's mutual fund industry in the 1990s was fuelled by money coming out of bank accounts and other low-yield instruments.

China's high savings rate is a result of "the turmoil that they've gone through in past decades," Legzdins said, but now people are starting to feel wealthier.

"I think you're going to see a lot more of that money go out of very low-yielding deposits and instruments, into more aggressive investments," he said.

Last year, Chinese regulators granted approval for Chinese commercial banks to set up and manage their own funds. The banks were already the country's biggest distributors of mutual funds.

Competition has heated up a bit, but it's "not having a big impact yet," Legzdins observed, adding that the majority of funds sold by banks are still those created by other firms.

"They sell a little bit of their own. I think in time that will increase," he said.

While the Chinese mutual funds market is growing rapidly and regulations are easing entry, Legzdins suggested it won't all be smooth sailing.

"When we started with Fullgoal, we bought into one of the 10 original (Chinese) fund companies," he said.

"The industry has grown to now over 50 firms and there are another 20 seeking approvals or in negotiations.

"So, you're looking at an industry that is going to have 70 to 80 fund companies a year from now. And yet, you only have six to eight significant distributors, which are the banks. So, for people entering the industry right now, it's pretty tough to fight for shelf space."

BMO does not disclose its profits from Fullgoal, which now has 11 funds and assets of $2.5 billion. Legzdins described the joint venture as being "very profitable," even with Chinese financial regulators capping management fees on its equity funds at 1.5 per cent.

In June 2005, China's stock market hit an eight-year low, but "even when the market was going down, the fund industry expanded substantially," Legzdins said.

Stocks have since rebounded, and "the market has gone from $10 billion to about $65 billion in the last five years," he said.

"That kind of shows you what can be done."
Bloomberg, Luo Jun & Doug Alexander, 30 October 2006

China Minsheng Banking Corp., the nation's fastest-growing bank, agreed to set up a 200 million yuan ($25 million) fund management joint venture with Royal Bank of Canada.

Beijing-based Minsheng Bank will own 60 percent of the venture while Royal Bank of Canada, that country's biggest bank, will control 30 percent, the Chinese firm said in a statement today. China Three Gorges Project Corp. will own the remaining 10 percent of Minsheng Royal Fund Management Co., based in Shanghai.

Royal Bank of Canada is joining Bank of Montreal and Allianz AG among other overseas banks that have set up fund ventures to tap China's $2 trillion of household savings. The Chinese government has been encouraging banks to set up fund management companies to diversify their revenue sources and increase the number of institutional investors in the nation's stock market.

Royal Bank invested about $7.5 million in the partnership to gain an entry into mutual fund asset management in China, RBC Management Chief Executive Officer George Lewis said today in an interview.

"This is a very modest investment on our part," Lewis said. "We recognize we will be learning more about the market and relying a lot on our local partner."

China's 49 fund companies managed 469 billion yuan of assets by the end of last year. Schroders Plc, JPMorgan Chase & Co. and Fortis AG are among foreign companies that have set up fund ventures in the country.

Bank of Montreal, Canada's fourth-largest lender, bought a 17 percent stake in Fullgoal Fund Management Co. in May 2003 through a venture with Haitong Securities Co. and Shenyin & Wanguo Securities Co. The bank increased its stake to 28 percent in 2004. Fullgoal had 20 billion yuan in assets at June 30th, and is the 11th largest in the country, according to Bank of Montreal figures.

"It's terrific for foreign firms to be entering the Chinese markets," BMO Investments CEO Ed Legzdins said today in an interview. "The more foreign players that are there, the better the Chinese fund industry will develop, and that'll benefit all of us."

Royal Bank also said today its RBC Capital Markets unit helped manage the sale of stock to institutional investors by the Industrial & Commercial Bank of China Ltd., in the world's biggest initial public offering.
The Globe and Mail, Tavia Grant, 30 October 2006

Royal Bank of Canada said Monday it was a co-lead manager of the institutional tranche for the Industrial and Commercial Bank of China's estimated $21-billion (U.S.) initial public offering, the largest IPO in financial market history.

Bank of Montreal also confirmed it participated as co-manager in the ICBC offering, though it wouldn't give any further details.

Both Canadian banks are aiming to capitalize on growth in one of the world's strongest economies. China will further open its financial services industry and may raise the cap on foreign ownership in the industry, the country's central bank said Monday.

For Canada's largest bank, the move should serve as a springboard for further deals in China.

“It's viewed by the capital markets as a proxy investment opportunity for China as a whole,” said Doug Guzman, head of investment banking for Canada, Europe and Asia, in an interview. “It's important for us, as an institution, to have secured quite a senior role in the group.”

RBC officials wouldn't disclose details about the degree of their involvement in the IPO. It said it was in the second-tier of firms involved in the transaction but played a “significant role” in the transaction.

ICBC is the largest commercial bank in China in terms of total assets, loans and deposits. It serves more than 2.5 million corporate customers and has more that 150 million personal customers.

RBC has 20 employees in China, according to Edwin Ball, RBC's head of financial institutions in Europe, Middle East, Africa and Asia, and that number is almost certain to balloon in the years ahead.

“From a strategic point of view, you can't be a bank with global aspirations and not have aspirations in China,” Mr. Guzman said. “We are very, very actively thinking about what is the next step.”

In a press release Monday, RBC said it plans to make investments in areas such as global debt markets, global financial institutions, private banking and fund management.