Ping An Insurance in Talks to Merge Banking Unit With Shenzhen Development

Ping An Insurance (Group) Co., China’s second-largest insurer, is in talks to merge its banking unit with Shenzhen Development Bank Co. to get around Chinese rules barring insurers from controlling more than one lender.

Ping An Bank Co. and Shenzhen Development Bank, both based in the southern city of Shenzhen, are working on an “unprecedented major restructuring,” according to announcements from the companies late yesterday. Shares of Ping An Insurance and Shenzhen Development Bank were suspended today.

Combining Ping An Bank and Shenzhen Development Bank would give Ping An Insurance control of a lender with 809 billion yuan ($119 billion) of total assets and help it avoid falling foul of regulations barring insurers from exerting power over two banks. Ping An Insurance is already in the process of buying a 29.99 percent stake in Shenzhen Development Bank, which was the nation’s first foreign-controlled lender.

“You don’t want to pitch your own units against each other,” said Luo Yi, a Shenzhen-based analyst at China Merchants Securities Co. who has a “strong buy” rating on the insurer’s stock. “The merger would extend Ping An’s reach in the banking market and broaden its customer base.”

Ping An Insurance currently serves 51 million retail customers and 2 million corporate clients nationwide, according to its website. Shenzhen Development Bank’s network of over 300 outlets will allow the insurer to better serve its customers whose average age is below 40 and whose assets will grow in the coming two decades, Ping An President Louis Cheung said a year ago when agreeing to buy a stake in the Chinese bank from Newbridge Capital LLC.

Buying Stake

Shenzhen Development Bank, the smallest among the nation’s 11 publicly traded national banks, fell 5.3 percent yesterday to close at 17.51 yuan, taking this year’s decline to 28 percent. Ping An Insurance slipped 1.5 percent to 46.81 yuan yesterday, for a 15 percent drop in Shanghai this year.

Ping An Insurance last month completed buying 520.4 million shares in Shenzhen Development Bank from Newbridge for about 11.45 billion yuan, making it the lender’s largest shareholder. The insurer this week won approval to buy as many as 379.58 million new shares in Shenzhen Development Bank in a private placement valued at 6.93 billion yuan.

Ping An Insurance will inject its banking unit into Shenzhen Development Bank, which in return will issue 1.5 billion new shares to the insurer, Caixin Online reported today without saying where it obtained the information. The insurer will own 51 percent of Shenzhen Development Bank after the transaction, which is still pending shareholder and regulatory approvals, the report said.

‘Difficult’

The insurer may “find it difficult” to sell the banking unit to Shenzhen Development Bank for more than the industry average of 1.5 times book value given weak market sentiment, according to Olive Xia, a Shanghai-based analyst at Core Pacific Yamaichi. That average price would value Ping An Bank at about 21.5 billion yuan, given its 14.3 billion yuan in net assets as of Dec. 31.

Shenzhen Development Bank last month appointed Richard Jackson, former head of Ping An Bank, as its president. Any insurance group, “in principle,” shouldn’t control more than one financial company that operates the same type of core business, according to a China Insurance Regulatory Commission regulation issued in March.

The deal may extend Ping An Chairman Peter Ma’s push to build a one-stop financial supermarket deriving two-thirds of revenue from non-insurance products in about 10 years. The insurer obtained 14.5 percent of last year’s non-life premium income from cross-selling within the group, while 57 percent of Ping An Bank’s new credit cards were issued to non-banking clients, according to its 2009 annual report.

Ping An Insurance, part owned by HSBC Holdings Plc, shifted its focus to the domestic market after losing $3.3 billion on an investment in Fortis, formerly Belgium’s biggest financial- services company, in 2008.

--Luo Jun, Zhang Dingmin. Editors: Andreea Papuc, Philip Lagerkranser

To contact Bloomberg News staff of this story: Luo Jun in Shanghai at +8621-6104-7021 or jluo6@bloomberg.net

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