China's Era of Bank JVs May Be Ending
With China Ocean Shipping Company (Cosco) planning to offload its 20% stake in ICBC Credit Suisse Asset Management, market observers across China worry the sale could mark the last of the great banking joint-venture deals in China. ICBC holds a 55% stake in the JV and Credit Suisse 25%.
The pilot regulations governing the formation of such JVs may not be extended beyond this autumn, says Hubert Tse, head of international business at Yuan Tai PRC Lawyers. Even signed deals—such as Huaxia Bank's agreement with F&C Asset Management and Bank of Beijing's deal with Bank of Nova Scotia—look uncertain, adds Tse, and could get overturned.
As for ICBC CS, the firm's key financial indicators point to a strong business, generating Rmb193.7 million ($28.4 million) in net profit in 2008 on gross revenues of Rmb629.11 million, according to an audit conducted by consultants Ernst & Young. As of the end of September, Shanghai research house Z-Ben Advisors ranked it as the 18th largest fund house in China, with an AUM of Rmb44.74 billion and a market share of 2.02%.
Given the JV's distribution prowess, supported by parent ICBC's vast network of 18,000 branches across China, Cosco is valuing its stake at Rmb258.2 million and this seems reasonable.
However, lucrative as the deal might sound, the list of potential bidders will be highly restricted. The pilot rules for bank JV ownership and management—issued in February 2005, but still a trial project—dictate that only state-owned commercial banks with experience in managing asset management companies within the Chinese domicile can bid to acquire a fund management company.
This leaves a relatively short list, and that's even assuming qualifying companies will want to support a competing brand at the expense of their own businesses. China Construction Bank owns CCB Principal; Agricultural Bank has a spanking new JV with Credit Agricole; Bank of China boasts Bank of China Investment Management (BOC IM), a partnership with BlackRock; and China Merchants Bank has China Merchants Fund, a JV with beleaguered Dutch group ING.
The buyer will require vetting by the China Securities Regulatory Commission (CSRC), China Banking Regulatory Commission (CBRC) and People's Bank of China on criteria that include capital strength, quality of brand and strength of branch network across China.
The deal is slated for a public auction on the Shanghai United Assets and Equity Exchange, but ICBC, as a founding shareholder that meets the above requirements, has not revoked its pre-emptive first right of refusal to buy back the stake. Z-Ben Advisors says ICBC will emerge as the only buyer, thus further consolidating its control of the JV by raising its stake from 55% to 75%. Credit Suisse declined to comment.
And, with the closing of the deal, Tse suggests the era of licence grabs for bank-affiliated fund management JVs will come to an end.
Bank JVs promise foreign fund houses a ready network of branches for fund distribution—an important point, considering distribution power in the vast country often makes or breaks brands in the initial years of a JV's life. In fact, this is a far more significant factor than investment track record in the unpredictable world of Chinese asset management.
The existing regime for bank asset management set-ups requires separate approvals from both the CBRC and the CSRC. The former supervises banks, the latter fund managers. The regime thus far has existed in the form of a pilot project on the back of an assumed collaboration between the two regulators.
But the collaborative work between the two regulators has not been a great help thus far. Among the JVs that formed under the trial rules, each company has its own set of problems.
CCB Principal has famously shopped beyond foreign shareholder Principal's investment capabilities for an external QDII adviser. Agricultural Bank has been concerned that Credit Agricole might abandon the young JV in favour of the bigger Fortune SGAM merger deal driven out of Paris. Though talk among management in Hong Kong is that the more likely scenario will see Credit Agricole give up Fortune SGAM.
To China Merchants Fund's embarrassment, ING once sought CSRC approval for a separate JV with Bank of Beijing. (CSRC officials quickly told ING to stick to its existing business.) China Merchants Fund was later faced with another would-be crisis, when China Merchants Bank exceeded its allowed holdings by owning a majority in both Bosera and China Merchants Fund at the same time. (It has recently sold off its 24% stake in Bosera.)
Bank of Communications Schroders and BOC IM appear to be faring better, though they aren't free of troubles, particularly with regard to investment team turnover.
Now that the big four state-owned banks all have an asset management set-up, the logic goes that the second-tier and privately owned banks should advance to the next round of approvals, to be followed by the smaller regional and city banks at later dates.
Given all these domestic JV traumas, and the unwinding of the all-in-one model of Western bank ownership of asset managers, Tse says the regulators have good reason to put the trial project on hold to rethink their approach.
Since Minsheng Bank received approval to form a JV with Royal Bank of Canada last year, there have been no moves to grant further licences still in the pipeline. A threshold for the size of these banks appears to have been reached, and the odds of smaller city banks running more successful JVs than their larger peers do not look favourable. Tse says it is likely that the framework that provides for further expansion of such set-ups will not be renewed.
The current pause in regulatory policies may also have implications for other operators seeking to break down the 'Chinese wall' and cross over to other businesses; securities brokerages, trusts and insurance, in particular.
For now, everything is on hold until the current mess in the Chinese fund management world gets sorted out.