Banks going global, but big risks remain

08:25, December 07, 2010      

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China's banks should strengthen their management and look for strategic alliances to improve their global competitiveness as the world economy recovers from the financial crisis, bank executives and experts said at the 21st Century Annual Finance Summit of Asia held in Beijing late last month.

It is inevitable that Chinese banks will search for growth overseas, said Luo Xi, vice-president of Industrial and Commercial Bank of China (ICBC).

"The internationalization of clients requires offshore expansion," he said.

Domestic banks have renewed interest in overseas mergers and acquisitions (M&As) after a 2008 ban was lifted.

Chinese banks retreated two years ago after ill-fated investments in companies such as Fortis, Blackstone and Morgan Stanley.

"Having experienced the crisis, Chinese banks have now increased their resistance to risk," Luo said.

The nation's commercial banks also need to build a strong international management system to aid yuan-denominated import-export settlement, said Bank of China (BOC) President Li Lihui at the summit.

Branching out

In their bid to expand into foreign markets, Chinese banks prefer branches or representative offices over M&As, according to a report from Accenture, a global consulting company.

By the end of 2009, ICBC had 180 branches in 21 countries outside China, while BOC had established offices in 29 overseas countries, the report said.

Trevor Gruzin, managing director of Asia-Pacific Accenture, told China Daily in an exclusive interview that organic growth is a better choice if banks aim to follow clients and develop geographically.

But if the purpose is to acclimatize to new market and prepare to be a leader, M&As may be a good strategy, he said.

"The key is to find out what you can do better than your competitors," said Gruzin.

To date, China's banks have focused on neighboring countries and emerging markets in Southeast Asia, the Middle East and Africa.

"We have fewer branches in global financial hubs such as New York and London," said Li of BOC.

He added that market share in North America and Europe is now limited by a lack of professionals and management capacity at China's banks.

"It calls on us to cultivate international financial talent, enhance operational skills and improve risk management to speed up offshore expansions."

"In the short term, Chinese banks may still prefer to develop in the Asia-Pacific region because it is easier, especially for mergers and acquisitions," said Alison Kennedy, a managing partner in financial services consulting at Asia-Pacific Accenture.

Chinese banks are expected to accelerate overseas expansion by boosting marketing strategies and providing services and financial instruments that suit high-end customers, said Li at the summit.

"The negative effects of the financial crisis still exist. Chinese commercial banks are facing a complicated international environment during the long-run recovery of global economy," Li said. "Their lack of ability to identify and control risks is one of the biggest threats in (moves toward) overseas business."

Long-term plan needed

The appreciation of China's currency has reduced purchasing prices for overseas banks, but the cost can rise in subsequent management, said Kennedy.

"A cheap price doesn't mean success. Banks should make long-term plans after mergers and acquisitions."

ICBC bought a 19.26 percent stake in Thailand's ACL Bank in 2009 and acquired 70 percent of Bank of East Asia (Canada) this year. It also bought Fortis Securities' primary dealer services in November.

China Construction Bank purchased AIG Finance Hong Kong in 2009 and Hong Kong-based Bank of America Asia in 2006.

"It is a good time for Chinese banks. They have strong balance sheets and market value, which are their competitive edge compared with overseas banks," said Gruzin.

"But they have to avoid over-valued and politically sensitive deals overseas."

Source:China Daily


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