Pudong Bank finds industrial white knight

By Wei Gu
March 1, 2010

China may be returning to an old way of doing business. In the days before Chinese banks sought international partners, they were often backed by industrial companies. Now China Mobile is likely to pay $5.9 billion for a 20 percent stake in Pudong Development Bank, diluting the U.S. Citigroup’s 3.4 percent of the Shanghai lender.

The mid-sized bank needs new capital, since its core capital ratio was close the regulatory minimum threshold of 7 percent in September 2009. The new funds would increase that ratio by 1.8 to 4 percentage points, according to CICC, enough to support three years of lending growth.

The relatively small bank might have trouble persuading the wounded Citigroup, which cares more about its 20 percent stake in Guangdong Development Bank, to put down more money. A public offering could be held back by the securities regulator’s preference for deals from larger, state-owned peers.

China Mobile might also look like a particularly handsome white knight to the Shanghai government, Pudong largest shareholder. The government wants the bank to play a role in its plan to make the city an international financial centre. China Mobile, owned by the central government, will be a strong alley.

It is less clear why China Mobile would invest more than a third of 2008 profits in the bank. Industrial synergies, say from phone banking, look minimal. There could be a short-term financial payoff — Pudong’s shares jumped 5.5 percent on the news of a possible deal. Longer term, China Mobile might like the idea of business earning a 30 percent return on equity, higher than its own 25 percent. But the bank would suffer if bad debts jump.

Perhaps China Mobile sees the bank as a new growth engine. The world’s largest mobile network operator is massively profitable, but the push into poorer provinces is cutting into revenue per user.

In both Japan and Korea, industrial-financial ties helped keep companies going in hard times and helped finance the migration from simple to more sophisticated industries. Contemporary China might be swimming in liquidity, but the deal is a telling example of how companies still need to be creative to get credit.

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