ICBC takes slow-burn approach to global expansion

January 30, 2014

By John Foley

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

ICBC’s purchase of Standard Bank’s UK trading division has moved at a glacial pace, and gives rivals little to fear. That’s the best sign that China’s largest lender knows what it’s doing.

To describe the deal as “cautious” would be an understatement. ICBC’s agreement to buy 60 percent of the South African group’s London subsidiary for around $765 million has been over a year in the making. The Chinese group also gets the right to buy a further 20 percent between two and seven years after the deal closes. Six months after that, Standard Bank has five years to sell it the remainder. In extremis, it could be 2027 before ICBC takes full ownership of a business which currently has a bit more than a hundred client-facing staff.

The logic of the deal is equally tentative. ICBC can mobilise its offshore yuan deposit funding, and the proceeds of a 2 billion yuan ($330 million) bond issue in London, to facilitate trading in yuan,  which is now the world’s second most used for trade. But the bulk of ICBC’s massive liquidity will remain locked up behind capital controls, out of reach of Western clients. Even when China’s own commodity markets open up, for example through the launch of Shanghai’s new free trade zone, it’s hard to see ICBC having much to offer that global rivals like HSBC can’t.

Nevertheless, slower is better. ICBC has domestic worries – it recently weathered the near-default of a financial product it sold, in an event so high-profile the chairman weighed in to deny the bank would be on the hook. Standard Bank was recently fined 7.6 million pounds ($12.6 million) by a UK regulator for failures in its money laundering controls.

In pursuing small and drawn-out deals rather than big opportunistic ones, ICBC and peers like China Construction Bank may miss a trick. China’s top five lenders have doubled their overseas loan books in four years, but takeovers have remained small. That seems at odds with perceptions that China’s corporates want to paint the map red. Instead, the slow approach makes it much more likely that China’s banks will do so without risking high-profile disasters.

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