Scots beat yanks in china bank deal - investing
With visions of an ATM in every environs in China, external banks and investment firms are queuing up to join the "China Club. "
The commencement fee for the "China Club" is basic and pure moneybags communism: invest cold hard cash in its basically broke state-owned banks, put your reputation on the line, reassure edgy alien investors about imminent IPO's, and share your risk management, corporate banking and other expertise with eager Chinese executives. The profit of connection in the China Club are attractive but as a rule maybes. Conceivably you will get some of your money back by underwriting an IPO or operational in China with the bank in the areas of wealth management, belief cards or corporate banking.
But the temptation is too much too resist and they are lining up for membership. Bank of America, the German bank Allianz, Goldman Sachs, Merrill Lynch, UBS, and the Royal Bank of Scotland (RBS) have all arranged to or are in ongoing negotiations to take evenhandedness stakes in China's big four state-owned banks. There is a different twist to the tale. Association fees are not the same for all but are negotiated one by one and this can leave a sweet or sour taste depending on the deal that's cut.
Paying More for Uncertainty
The hot deal inked by the Royal Bank of Scotland led grouping is the best so far and beats the well revealed Bank of America deal hands down.
Bank of America purchased a 9% stake in China Construction Bank for $3 billion. The Royal Bank of Scotland (RBS) invested $1. 6 billion for a 5% stake and brought along Merrill Lynch and Hong Kong industrialist Li-Ka Shing along to share the risks bringing the total investment to $3. 1 billion for a mutual 10% stake. The RBS group also paid less than Bank of America which paid 1. 2 times acknowledged book value. Even beat than putting up less cash and being paid a little beat value, the Scots were able to extort a life preserver from their Chinese partners. While information have not been released, the RBS group will get some of their money back if there are black holes in the books, if the IPO scheduled for early next year is cancelled or if the banks just don't see eye to eye.
Thank You. May I Have Another
The difficulty is will association fees decline over time or get steeper? Goldman Sachs and Allianz are in talks to pay about $1 billion for a stake in China's biggest state-owned bank - the Engineering and Advertisement Bank of China. China privileged UBS is also discussing an investment of $500 million in the Bank of China to bolster its lead underwriting role in next years IPO.
This rush by external banks to get a piece of the China accomplishment be supposed to make shareholders pause. Just like when you join the local fatherland club, there are startling risks and expenses. Soon the monthly dues are raised and then there are the dreaded "special assessments" for new greens, a swimming pool or a new irrigation system.
Risk, Come again - Maybe?
China's large state-owned banks have an colossal burden of non-performing loans made over the years to poorly performing arts state-owned companies. With a small marginal stake, external banks will have very imperfect say about the management of their partner bank. As the old banking adage goes, if you owe the bank a barely money, the bank owns you, if you owe the bank a lot of money, you own the bank. For investment banks, the bribe seems even slimmer. Investment banking and underwriting fees are disreputably slim in Asia and IPO after marketplace appreciation will have to be ample to enjoy a risk-adjusted return.
And don't even think of absent a payment. Last year Citigroup was select to back a $5 billion inventory for China Construction Bank after donation to asset an evenhandedness stake. It was later dropped like a hot potato after fading to abide by through.
I hope all of these banks make lots of money in China - but it may not be wise to trade billions of hard earned center for a maybe.
Carl Delfeld is head of the comprehensive advisory firm Chartwell Partners and editor of the Chartwell Advisor and the Asia Depositor Acumen newsletters. He served on the executive board of the Asian Change Bank and is the biographer of The New Inclusive Financier (iUniverse:2005). For more in rank go to http://www. chartwelladvisor. com or call 877-221-1496
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