Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

A founder of China Minsheng Banking is at pains to clarify that the recent doubling of his stake in the country's first private lender isn't about a struggle for control. That's a shame.

After spending about $1.1 billion in a matter of weeks buying the bank's shares, Vice Chairman Lu Zhiqiang said he had "a lot of respect" for Anbang Insurance, Minsheng's biggest shareholder, and agreed with them about "many aspects" of the bank's development.

Investors had been hoping for Lu to strike a more aggressive posture. Coming on the heels of a hostile takeover attempt for Chinese real estate giant Vanke, a bidding war for Minsheng could light up the stock. Through his China Oceanwide Holdings unit, Lu now owns 4.6 percent of the bank he formed in 1996 with 58 other private investors including Liu Yonghao, who runs China's largest animal-feed producer, New Hope Group.  

Now that he's above the 3 percent threshold where he can propose changes to the board, Lu gets a tactical leg-up on Anbang, which doesn't have a voting board seat despite its 17.8 percent stake.

A contest for control is what Minsheng needs to justify the premium its stock enjoys. The lender's Hong Kong-traded shares have returned 68 percent over the past five years in dollar terms, while its Shanghai-listed stock has doubled. The CSI 300 Financials Index, by comparison, is up 44 percent.

Behind the Big Guns
China Minsheng is the country's sixth-largest bank by deposits
Sources: Company filings, Gao Hua

The core business of Minsheng doesn't seem to offer much vindication for the stock's strong performance.  

For one, growth has slowed of late. In the March quarter, Minsheng's risk-weighted assets increased less than 1 percent from the previous three months, the slowest pace in nine quarters. That may be partly because the bank is tightening lending standards for small businesses. But less risk means fewer rewards. Minsheng's net interest margin is down to 3 percent of risk-weighted assets, compared with the 4 percent or more it routinely enjoyed even during the 2008 financial crisis.

Back to Earth
China Minsheng's superior return on equity sinks to converge with ICBC's
Source: Bloomberg

What is growing is the bank's reliance on other financial-sector borrowers. Investment in asset management plans and trust beneficiary rights jumped nearly 86 percent from a year earlier to 389 billion yuan ($58.3 billion) at the end of 2015. That exposure to the shadow banking industry is now bigger than Minsheng's entire unsecured loan book.

To grow, and grow more normally, Minsheng needs capital. Its tangible common equity equates to just 9 percent of risk-weighted assets versus almost 13 percent for ICBC, China's largest lender. That's too thin a cushion in case things go wrong. At 1.6 percent of total advances, nonperforming loans aren't a problem -- at least not yet. But more than 4 percent of shareholders' equity is tied up in off-balance-sheet commitments, much higher than the average for Chinese banks, banking analyst Daniel Tabbush wrote on website Smartkarma .

If nothing else, a hostile deal would be a welcome distraction for shareholders from Minsheng's falling return on equity. Such a pity that the gloves are refusing to come off.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That's because China's banking regulator hasn't approved Anbang's shareholding. It's unclear why Anbang hasn't been given approval by China Banking Regulatory Commission.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at