23 October 2006

Scotiabank is Vying for Bank in Dalian, China

SinoCast, 23 October 2006

Only one of the Canadian and Italian bidders will manage to buy a 20% share in Dalian City Commercial Bank in northeast China, a local report cites the bank's president Wang Jingping as saying.

DCCB, which is on the global list of top 1,000 banks, also will sell 5% to the International Finance Corporation, a member of the World Bank Group, Wang reveals. The sale proceeds are expected to strengthen DCCB's capital so as to meet regulatory level. IFC is to be its financial investor while Scotiabank is vying with Banca Intesa for the strategic investor position, according to Wang.

His company DCCB is based in Dalian, a biggest city in China's reviving northeast region. DCCB ranks sixth among all the over 100 city commercial banks in the country. It has assets of over CNY 50 billion. City banks used to be the financing platform for local governments, and their balance sheets are still hurt by legacy problem. But they are increasingly watched by the national regulator, China Banking Regulatory Commission, who encourages them to accept foreign investors to cut bad assets.

National Australia Bank once showed interest in DCCB's growth potential, but the Australian buyer has failed to enter its two-member list for deep negotiation, earlier reports said.

If Banca Intesa, one of the leading Italian banking groups, wins the DCCB bid, it will represent a milestone event for the expansion in this part of the world. According to its website, Banca Intesa serves approximately 13.8 million customers through a network of around 4,400 branches in Italy and abroad. But it has so far opened only one branch and one representative office in mainland China. By contrast, British banking group HSBC has branched into many Chinese big cities offering deposit and loan services to a wide range of corporations and consumers here.

Meanwhile, even Royal Bank of Scotland who lacks organic growth has made a major investment in China's vibrant banking industry. The industry, dominated by the country's Big Four state banks, is opening wider to foreign competition as Beijing fulfills its pledges to the World Trade Organization. That can help Canada's Scotiabank expand its sphere of influence. Besides the ongoing bid for DCCB, the bank has already partnered with IFC to invest in Xi'an City Commercial Bank, a leader in the northwest. DCCB's capital adequacy ratio is short of the regulatory standard of 8%. It will issue debts and mixed capital bond starting next year, Wang says. The bad loan ratio was cut to 6.24% at the end of 2005 following Dalian's government bailout. As the asset quality improves further, DCCB plans to become a public company in 2008, which can be a cash-out opportunity to the financial investor IFC. IFC, for instance, has unloaded a big part of its holding in Nanjing City Commercial Bank in the east. It profited much by selling the stake to France's BNP Paribas.

The cross-city operation is another goal for Wang's management team. Bank of Shanghai and Bank of Beijing have won approvals to operate outside of their home cities for the first time, as regulators support good players while reforming waning peers. Bank of Shanghai is in strategic partnership with HSBC and Bank of Beijing has been winning technical assistance from ING of the Netherlands.