BNP Paribas SA (BNP), France’s largest lender, plans to bolster its stake in Bank of Nanjing Co. to as much as 20 percent as Chinese lenders’ profits defy the global economic slowdown and rise to a record.
BNP Paribas will buy the shares in the secondary market to increase its holding from about 15 percent to closer to the maximum allowed under Chinese law, China Chief Executive Officer Clarence T’ao said in an interview yesterday in Shanghai. A 5 percent stake would cost about $200 million at Bank of Nanjing’s share price today.
Investing in local lenders in China has reaped bigger profits for foreign banks including Goldman Sachs Group Inc. (GS) than running their own franchises in the world’s second-largest banking market. The Western firms’ gains on the stakes are set to exceed their investments with more than $20 billion in holdings remaining even after they recouped about $24 billion over the last three years, data compiled by Bloomberg show.
“We’ve always adopted a more strategic approach to our investments in Bank of Nanjing,” T’ao, 51, said. “It’s not surprising that you see the bank actually trying to get back to a higher level.”
BNP Paribas bought 19.2 percent of the Chinese lender in 2005, two years before the bank’s initial public offering diluted that stake to about 12.7 percent. The Paris-based lender purchased an additional 2 percent stake from Oct. 10 through Dec. 6, Bank of Nanjing, based in the eastern city for which it’s named, said this month.
Global banks and financial institutions including Singapore’s Temasek Holdings Pte invested a combined $33 billion in Chinese banks from 2001 to 2009, according to data compiled by the nation’s banking regulator.
Goldman Sachs, which in 2006 invested about $2.58 billion of its own and client funds in Beijing-based Industrial & Commercial Bank of China Ltd., has since recorded more than $3.1 billion of gains on its proprietary holding, according to company filings. The New York-based bank doesn’t disclose the size of the gains made by its investment funds from ICBC, the world’s most profitable lender.
Citigroup Inc. (C), the third-largest U.S. bank, sold its 2.71 percent stake in Shanghai Pudong Development Bank (600000) to institutional investors for after-tax proceeds of about $349 million, it said in a statement in March. The U.S. bank still owns 20 percent of Guangdong Development Bank Co.
Such profits overshadow the $10 billion that global banks have jointly earned over the past decade from the $27 billion they’ve spent on building their own franchises in China, the regulator’s data show.
Overseas banks have 387 branches in China, compared with about 66,600 operated by the five largest state-owned lenders led by ICBC. The foreign firms held just 1.6 percent of the nation’s 83 trillion yuan ($13 trillion) of deposits and made 1.7 percent of its 58 trillion yuan in loans as of Dec. 31, according to the China Banking Regulatory Commission.
The combined profit at China’s four largest banks rose 15 percent to 189 billion yuan in the third quarter, almost triple the amount at the top four U.S. banks.
“If you look at the profitability of those Chinese banks, they’ve been much higher than what BNP can get perhaps in Europe,” Ismael Pili, head of Asia bank research at Macquarie Capital Securities Ltd., said by telephone today. “Trying to bring it up to the limit of 20 percent is probably a smart thing to be doing.”
For BNP Paribas, profit this year from its Chinese unit is set to decline as the country’s economic growth moderates and the European debt crisis curbs demand for trade finance, T’ao said. The French bank earned a record $85.6 million in the country last year, an increase of almost fourfold from 2010, according to its annual report for China.
“We will not be able to achieve the record results that we achieved in 2011,” T’ao said.
While the lender’s operations were profitable in 2012, T’ao said he’s “more optimistic” for next year as the country’s new leadership takes over and the economy rebounds.
Still, the investments in Chinese lenders aren’t without risks. Shares in Bank of Nanjing have declined 10 percent this year in Shanghai trading, slipping 1.9 percent to 8.34 yuan at 1:56 p.m. Bigger rival ICBC has lost 6.6 percent on the mainland and advanced 18 percent in Hong Kong trading this year, while BNP Paribas has climbed 42 percent in Paris.
Bank of Nanjing is trading at 1 times estimated book value for 2012, according to data compiled by Bloomberg. Chinese banks dropped to record-low valuations this year on concern that an economic slowdown and interest-rate deregulation will erode profits.
Two calls to Bank of Nanjing’s press office seeking comment on BNP Paribas’s plans went unanswered today.
The French lender’s investments in China come amid a global retrenchment by European banks as they seek to curtail losses following the region’s three-year financial crisis. The lenders have cut international assets by 40 percent, or $7 trillion, in the past four years, including $2 trillion in the past year, Morgan Stanley analysts led by Huw van Steenis in London wrote in a Nov. 20 report.
French banks including BNP Paribas and Societe Generale SA, which have cut debt holdings in Europe’s troubled periphery by more than 35 percent since the start of the euro-area crisis, are still struggling to shake off their image as surrogates for the region’s woes.
The investment “demonstrates how tough it is these days to be an EU bank,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., wrote in an e-mail. “Management has clearly decided that it is better to invest in the Mainland market at this point than to invest in the home market.”
BNP Paribas is also interested in finding a new local partner to access China’s securities market, T’ao said. The lender pulled out of a three-year-old investment banking venture with Changjiang Securities Co. (000783) in 2007, selling its 33 percent stake to the Chinese broker after disagreeing on strategy.
“BNP Paribas is not a bank that wanted to go in, get out, go in and get out,” T’ao said. “We actually look at our partners carefully. There have been more failures than successes in the market.”
China in May raised the ceiling on foreign banks’ investments in such securities joint ventures to 49 percent from 33 percent, the first increase in more than a decade. Goldman Sachs, which in 2004 became the first Wall Street firm to form such a venture, and UBS AG were the only firms to have management control of those businesses at that time.
Morgan Stanley in 2010 sold its minority stake in China International Capital Corp. after a 15-year involvement in the first Sino-foreign brokerage venture, opting instead to form a partnership with Shenzhen-based China Fortune Securities Co.
Citigroup in August started an investment banking joint venture with Orient Securities Co., gaining access to the world’s second-biggest market for share sales.
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