Industrial & Commercial Bank of China Ltd. won approval to buy a U.S. lender in the biggest opening of the American banking market to Chinese companies, less than a week after economic talks in Beijing.
The Federal Reserve allowed ICBC to operate as a bank holding company, buying a controlling stake in Bank of East Asia Ltd. (23)’s U.S. unit. The Fed also allowed Bank of China Ltd. and Agricultural Bank of China Ltd. to open U.S. branches, the regulator said yesterday on its website.
The decision, which was reviewed by the Department of Justice, marks the first time regulators have allowed a Chinese bank to buy a majority stake in a U.S. depository institution. ICBC Chairman Jiang Jianqing has spent more than $6 billion on acquisitions in regions spanning Asia to South Africa and America over the past three years, seeking to triple the share of profit coming from abroad to 10 percent.
“The deal is insignificant to ICBC’s operations but the implications are profound as it opens up the U.S. market to further expansion from ICBC,” Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a note. The announcement “is a watershed moment, as it makes possible greater participation from other Chinese banks.”
Toehold for Growth
The $140 million acquisition of 80 percent in Bank of East Asia’s U.S. arm gives Beijing-based ICBC 10 branches in California and three in New York, a toehold for U.S. growth. The initial agreement in January 2011 was among as many as 60 signed by Chinese and U.S. firms during President Hu Jintao’s visit for talks with President Barack Obama.
“This will be conducive to Chinese banks’ strategy to go abroad and reduce reliance on the domestic market, where competition is intensifying and growth is slowing,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. “Gaining access to the U.S. market is a breakthrough as Chinese banks normally find it easier to target emerging countries.”
China Construction Bank Corp. (939), the nation’s second largest, is in talks to buy the South American assets of WestLB AG, the Wall Street Journal reported yesterday, citing a person it didn’t identify. The bank seeks the assets to pursue commercial banking in the continent in a deal that may be valued between $200 million and $300 million and wrapped up by June, the newspaper said.
A Beijing-based press officer at Construction Bank declined to comment.
‘Opens the Door’
The Fed’s ruling may boost the value of U.S. banks as it “opens the door” for Chinese lenders to pursue mergers and acquisitions, said Jaret Seiberg, senior policy analyst at Guggenheim Securities’ Washington Research Group.
“This could accelerate M&A as Chinese banks may look to acquire regional banks in order to establish a U.S. footprint,” Seiberg wrote in a note to clients.
The move came as China raised the ceiling on foreign banks’ investment in its securities ventures for the first time in more than a decade after the annual Strategic and Economic Dialogue with the U.S. Banks including JPMorgan Chase & Co. are allowed to raise their stakes in ventures with domestic securities firms to as much as 49 percent from the current 33 percent.
ICBC was the largest bank in China at the end of 2011, with $2.5 trillion in assets, and is about 71 percent-owned by the government, according to the Fed’s order. Bank of East Asia, based in Hong Kong, is run by the family of Chairman David Li.
Bank of China, the third-largest Chinese bank by assets, received approval to open a federal branch in Chicago, while Agricultural Bank, the fourth largest, obtained approval to open a state-licensed branch in New York, according to the Fed.
The U.S. also granted bank holding company status for ICBC’s government shareholder Central Huijin Investment Ltd. and that company’s parent, sovereign fund China Investment Corp.
ICBC bought a 70 percent stake in Bank of East Asia’s Canadian unit for about C$80.3 million ($80.2 million) in 2010 to gain a “strong platform to further expand our businesses and network across North America,” Chairman Jiang said then.
Other Chinese banks have sought to expand in the U.S. An attempt by Beijing-based China Minsheng Banking Corp. (600016) to buy a controlling stake in UCBH Holdings Inc. ended when UCBH collapsed in November 2009. Minsheng, which held a 9.9 percent stake, couldn’t complete the deal because it ran out of time, not because the plan was rejected by U.S. officials, a person briefed on the matter said at the time.
Chinese banks previously have been allowed to open U.S. branches. In 2007, the Fed cleared China Merchants Bank Co. to open a branch in New York, making it the first Chinese bank to establish a U.S. presence in more than 15 years. ICBC opened its first U.S. branch in October 2008.