For an investment partnership so firmly rooted in the U.S., Newbridge Capital has done surprisingly well in Asia. Newbridge is an offshoot of Texas Pacific Group Inc., whose principal, David Bonderman, has made a fortune several times over by investing in such properties as Continental Airlines Inc. and American Savings Bank. But at the height of the Asian crisis a few years ago, Bonderman couldn't resist making a play for what he saw as a cheap property: Korea First Bank. Newbridge's team gave Korea First a bracing dose of Bonderman's trademark risk management and profit focus and turned it around.
Now Newbridge has embarked on a new and much more ambitious Asian adventure--an investment in a mainland China bank. Hong Kong financial sources say Beijing has given the green light to the sale of a controlling stake in state-owned Shenzhen Development Bank to Newbridge. The sale would mark the first time a foreign institution has controlled a Chinese bank since the 1949 Communist Revolution. "The deal will help Shenzhen Development Bank become more market-oriented," says a Chinese financial official.
If Newbridge can pull off the transaction, it will accelerate the quickening process of change in China's banking sector. As part of China's entry into the World Trade Organization last December, Beijing promised that foreign banks would have full access to the Chinese market by 2006. That has forced Chinese officials to redouble their efforts to upgrade the financial knowhow of local banks. In turn, foreign banks are eager to tap a fast-growing market that boasts $1 trillion in deposits.
The deal would have Newbridge buying the nearly 20% of Shenzhen Development Bank that is now held by Chinese government entities. That's enough to give the San Francisco-based private-equity firm control of the board of directors, because 72% of the bank is held by the public. The bank declines to confirm the deal, although it said in a statement to the Shenzhen Stock Exchange that it has received approval "in principle" from authorities. "We are still in talks with several foreign strategic investors and haven't settled on a final plan," the bank said in the statement. Officials at Newbridge and the Chinese government entities either couldn't be reached for comment or declined to comment.
Pricing is a potential stumbling block, since the price and the deal are subject to due diligence. Last year, HSBC Holdings PLC bought a noncontrolling stake in the Bank of Shanghai for 1.67 times book value. Shenzhen Development Bank has a book value of almost $500 million, so if Newbridge used the same formula as HSBC, a 20% stake would cost about $167 million.
Shenzhen Development Bank was the first bank--and one of the first companies--to go public in China. Founded in 1987, it launched its initial public offering during the earliest days of China's securities market, in 1988. Reflecting that pioneer status, its stock symbol is 000001. The bank's strong financial performance helped spark China's first bout of stock market fever back in 1989, with its share price tripling in the first half of 1989.
More recently, the bank's share price shot up in mid-June on rumors that Shenzhen was discussing a linkup with foreign buyers. Overall, shareholders who have held on to the stock for the past 10 years have seen a total return of 427%, compared with 63% for the Shenzhen A-share index.
The bank seems to have avoided the worst of China's banking mess, helped by its youth and its base far from the corridors of power in Beijing. Its bad loans as of June comprised just 6% of its portfolio. That compares with the estimated 50% nonperforming-loan ratio at China's four largest state banks. Shenzhen had been growing 30% a year before hitting an air pocket in 2001, when it made additional provisions for possible bad loans. Profits fell last year but rose 41% in the first half of this year, to $38 million.
If Newbridge's record at Korea First is any indication, the firm is likely to bring in a coterie of executives with foreign experience to revamp and westernize Shenzhen's business practices. It also will likely try to expand the bank's small consumer-banking business. Newbridge's example could change the way the money game is played in China. That could mean good profits for Newbridge. But more important, it could mean a big boost for better banking practices in China.
By Mark L. Clifford in Hong Kong