Chinese banks, in an effort to grow beyond the mainland's borders, have plowed large amounts of capital into acquisitions, new branches overseas and joint ventures. Although analysts are critical of their efforts, calling them pricey and poorly directed, banks see opportunity beckoning.
Reuters reported that banks are trying not just to expand their overseas presence, but also to cater to Chinese expatriates and provide yuan-based financial instruments through their buy-ins to non-Chinese companies and desk facilities inside other financial institutions. The ROE for their efforts, however, is considerably lower than expansion within the mainland would bring, according to experts.
Industrial and Commercial Bank of China (ICBC), state-controlled and the nation's largest bank, as well as the world's largest bank by market value, announced this week that it had been successful in gaining a license to open a branch in Mumbai. This is the first toehold in India for a large mainland bank. However, James Antos of Mizuho Securities was critical of ICBC's acquisitions, and said in the report, "It's a poor use of capital. They've spent $9.5 billion in the last five years buying banks with no market share. It's an awfully expensive way to add 3.5% to your profits."
ICBC's ROE within China stands at about 22%, according to Barclays Capital; its ex-continental activities only bring in about 14%. Charles-Everard de T'Serclaes, a J.P. Morgan executive director, was quoted in the report saying that China's banks "have a fantastic market that is huge, that's untapped, that's underpenetrated. They can go on creating value for their shareholders for the next 10-20 years without doing anything major."
ICBC spent $5.6 billion to acquire a 20% stake in Africa's largest bank, Standard Bank Group, in 2008; that allowed Standard as of last October to begin offering yuan accounts across the continent. In January ICBC spent another $140 million to scoop up the majority of Bank of East Asia's U.S. operations. It plans to open 5 more European branches and has put in applications to provide banking branches in Peru and Brazil, according to reports.
Bank of China boasts 711 branches operating outside of the mainland, opened a Cambodian branch earlier in May, and just last week launched a desk within the United Arab Emirates, where it does not have a full branch, at a local bank; it has similar desks in
Oman, Peru, and Ghana. And the nation's second-largest lender, China Construction Bank Corp., was considering taking a stake in EON Capital of Malaysia before that entity was instead taken over by Hong Leong Bank.
Compared with institutions in more mature markets, say analysts, Chinese banks are inexperienced and thus exposed to more risk. There are also issues within those markets concerning attempts by Chinese institutions to hold too much control within an acquisition. Er-Cheng Hwa, a former chief economist for CCB, said in the report that within markets such as the U.S. and Europe, "the financial sophistication is much higher than in China, and getting people is a challenge for Chinese banks. There's not much incentive to move to those markets."
However, "There's a prestige aspect of having branches in London and New York," said Michael Pettis, associate professor of finance at Peking University's Guanghua School of Management. He added in the report, "it will be difficult for a while for Chinese banks to be competitive, except on a price basis—extending loans at very low interest rates."
Barclays Capital banking analyst May Yan was quoted saying, "Particularly for banks, when they try to make acquisitions in the U.S., there have been a lot of political obstacles and regulations. They couldn't do it. That's why they're more active these days in emerging markets making acquisitions."
That’s exactly what Chinese banks are doing, despite the risks. Emerging markets have not reached the saturation point that developed markets have, and the already-established relationships China has developed through foreign aid and trade in developing nations offers an entrée for the banks. Chairman Jiang Jianqing of ICBC was reported to say in an interview, "Over the next several years we will mainly look at emerging countries, and mainly consider their economic potential, growth rate and extent of their trade relations with China."
Zhao Changhui, chief country risk analyst for China Export-Import Bank, put it this way in the report: "Yes, it's costly, but a lot better that they have services to help their loyal customers rather than scare them away because they cannot provide services that are expected or required. This is a new beginning."