Nov. 16 (Bloomberg) -- Citigroup Inc. signed a $3.1 billion agreement to take control of state-owned Guangdong Development Bank, becoming the first overseas financial-services company to manage a Chinese bank.

Citigroup, the biggest U.S. bank, and its partners beat Paris-based Societe Generale SA and China's Ping An Insurance (Group) Co. in the 18-month race to buy 86 percent of Guangdong Development. New York-based Citigroup will own 20 percent, according to a copy of the statement given to Bloomberg News.

Chief Executive Officer Charles Prince wants to increase the share of earnings from outside the U.S. to 60 percent from about 40 percent. Citigroup has trailed global competitors, including Bank of America Corp. and HSBC Holdings Plc, in investing in Chinese banks, whose profits are climbing as economic growth drives demand for loans and credit cards.

``Citigroup, like everyone else, needs a ticket to really get into China and this should be a big breakthrough for them,'' said Winson Fong, who helps manage $2 billion at SG Asset Management in Singapore. ``It's just a beginning. It's easier said than done when it comes to implementing the cross-selling strategies with its other partners.''

Citigroup will appoint a CEO for Guangdong Development by the time the transaction is completed, expected by the end of this year, Richard Stanley, the U.S. bank's head of China, said after the signing ceremony today in Guangzhou, the capital of Guangdong province. The acquisition is subject to final regulatory approval.

Effective Control?

The three-page document given to Bloomberg gave no details on how many board seats Citigroup would be able to appoint, whether the U.S. bank has veto powers over decisions or if it has the right to buy out its partners should China's ownership rules change.

``We're going to engage quickly with our consortium members,'' said Bob Morse, Asia Pacific CEO of corporate and investment banking. With regards to Guangdong Development Bank, we're going to ``contribute wherever we can to its personnel, to its management.''

The Guangdong deal will give Citigroup and its allies, including International Business Machines Corp. and China Life Insurance Co., access to 500 banking outlets in a market where annual loan growth averaged 14.5 percent from 2000 to 2005. Citigroup's stake is valued about $720 million. Citigroup now has 13 outlets in China, where it typically takes six months to win regulatory approval to open a new branch.

The Chinese bank, established in 1988, is mostly based in Guangdong, a province of 110 million people with the nation's highest per capita income after the cities of Beijing and Shanghai and Zhejiang province.

Provincial Flavor

Citigroup will have its work cut out restructuring the bank, said Kent Yau, deputy head of research at Core Pacific-Yamaichi International in Hong Kong.

``Usually these kinds of banks have a very strong provincial government flavor,'' Yau said. ``The influence of local government and businessmen is going to be there always. So Citigroup has to put in a lot of effort over the next three to five years to whip the bank into shape.''

Guangdong Development's bad loans accounted for 21.9 percent of total lending at the end of 2003, the latest figure from the company. The bank's capital adequacy ratio was 3.87 percent at the end of 2003, according to Standard & Poor's, below the regulatory requirement of 8 percent.

Guangdong Development will receive about 60 billion yuan ($7.6 billion) from the sale of non-performing loans and after the provincial government sells water and electricity assets, people with direct knowledge of the matter said this week.

Big Blue

The Chinese bank forecast it will earn 2.8 billion yuan in pretax income in 2006 and reduce its bad-loan ratio to around 4 percent this year after its restructuring.

As part of the bidding group, Armonk, New York-based IBM, the world's biggest computer-services provider, will buy 4.7 percent of Guangdong Development. China Life and State Grid Corp. of China will each own 20 percent, the statement said. China Citic Trust & Investment Co. will hold 12.8 percent and China Puhua Investment will take 8 percent, the release said.

Citigroup and its allies agreed to pay 24.3 billion yuan for their stakes, the statement said.

IBM is buying its stake through IBM Credit LLC, the statement said.

Citigroup was chosen because the bidding group offered a higher price and better terms, and because of their ability to contribute to Guangdong Development's future, the release said.

Citigroup also signed an agreement to provide support in eight areas, including risk management, information technology, financial control and corporate governance, it said.

Ownership Rules

``Citigroup is going to lead the consortium as it is one that really knows about banking, the rest of the members are just chipping in for profit,'' said Yau. That ``means Citigroup still has control of GDB.''

China had refused to bend rules that restrict foreign companies from owning more than 20 percent of a domestic bank, forcing Citigroup to scale back its plan to buy 40 percent of Guangdong Development.

Deutsche Bank AG is advising Guangdong Development. Citigroup is advised by its own investment banking unit.

``Citigroup recognizes that in order to get longer-term revenue growth they need to have presence in the emerging markets,'' said Patrick Lemmens, who helps manage $3.5 billion at ABN Amro Asset Management in Amsterdam. ``China is growing very fast and it's going to be a growth level which will be seriously better than most economies globally.''

Slower Approach

In April, the U.S. Federal Reserve lifted a 13-month ban on large acquisitions by Citigroup, put in place because of what the regulator said were lax controls.

Prince slowed the pace of acquisitions that had been Citigroup's hallmark under his predecessor, Sanford Weill. From 1986 to 1998, when Travelers Group Inc. bought Citicorp to create Citigroup, Weill made more than 100 purchases, transforming a Baltimore-based consumer lender into a bank, brokerage, securities firm and insurer with operations around the globe. Prince took over as CEO in 2003.

The U.S. bank last month agreed to buy 20 percent of Turkey's Akbank TAS for about $3.1 billion, Prince's largest purchase.

Citigroup's international unit contributed 43 percent of third-quarter profit and produced almost all the revenue growth in consumer banking, the company said on Oct. 19. The company opened a record 277 branches in the third quarter, most of them outside the U.S.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net.

Last Updated: November 16, 2006 07:56 EST