By Wang Yanhua, China Business Feature

BEIJING - China Merchants Bank (CMB), the Mainland's fifth largest listed bank, made a major decision to be "first", again. This time it cost CMB RMB17.2 billion (US$2.5 billion) to obtain 53.12% of Wing Lung Bank Ltd. (WLB), a family-run bank in Hong Kong. The controlling Wu family sold WLB, which they built and have been operating with painstaking effort for 75 years, to CMB at HK$156.5 (US$20) per share. CMB triggered a legal takeover offer. So based on the share price, CMB had to pay RMB32.4 billion (US$4.2 billion) for the acquisition, almost the first knock out offer. This is all taking place while China's homegrown banks "go global". The offer was, however, the most expensive lender acquisition in Hong Kong's banking sector since the Development Bank of Singapore (DBS) bought Dao Heng Bank in 2001.

Insiders thought CMB had emptied its pockets with the high price. They also thought the return of shareholders would be diluted for a long time and it would take CMB at least five years to recover its investment. Merrill Lynch, Goldman Sachs, HSBC and others downgraded the ratings of CMB H-shares to "market weight", while Standard & Poor's put CMB on review for a credit-rating downgrade.

CMB itself, however, thinks the acquisition a "very exciting" event. Qin Xiao, the chairman of CMB, said it's a strategic move and "an important milestone in the history of CMB". The acquisition allows CMB to enter Hong Kong, a highly developed market of great strategic significance.

This may be the reason why CMB made up its mind to win. Since CMB had one office in Hong Kong, much less than the country's largest lender Industrial and Commercial Bank of China (ICBC), it's obvious that CMB was more insistent in acquiring a local in Hong Kong bank. But will CMB get what it wanted after paying such a high price for Wing Lung?

CMB's Needs

China's booming economy has produced a great many companies that want to go global. The soaring market capitalization of banks has also provided capital support for lenders eyeing going global. Data shows that five Chinese banks invested in nine foreign financial institutions, seven opened 60 branches overseas, and total overseas assets reached US$267.4 billion by the end of 2007. ICBC has been searching for sellers all over the world, China Development Bank (CDB) bought shares in Barclays, and Citic Bank struck a deal with Bear Stearns... China's banking has been "testing the water" frequently overseas.

Zhou Xiaochuan, the governor of the People's Bank of China, the central bank, said the authorities have developed favorable policies to support China's homegrown banks in M&As overseas. He also said China's commercial banks are encouraged to set up branches overseas and to try to buy stakes of foreign financial institutions, and then provide financial services for China's homegrown enterprises that want to "go global".

On top of the financial services available to China's homegrown enterprises overseas, there's a chance globalization could shift operational risks to international markets. "Enterprises are given great opportunities in the fast expanding domestic economy and improved domestic financial environment, and also face formidable challenges of unstable factors and operational risks in the international market," CMB's 2007 Fiscal Report stated.

 

There are two ways Chinese banks go global. "One is entering international markets through Hong Kong, and the other is acquiring interests in foreign banks," Li Yamin, analyst of Shenyin Wanguo Research & Consulting, China's leading financial research firm. ICBC and China Construction Bank (CCB) adopted the former approach; and some others the latter. For example, China Minsheng Banking Limited directly bought stakes in UCBC Holdings, Inc.-the first deal that saw a Chinese bank investing in a US peer.

CMB, known as "the maker of sensational news" in the banking industry, has been premeditating its globalization for a long time. The branch it set up in New York City is China's first bank branch since the founding of the People's Republic of China in 1949. It is also the result of 16 years of hard work. But CMB is not satisfied with only an overseas branch for its globalization. More than a decade ago, CMB showed that it had innovation and leadership in its bones. But after its "all-in-one card" and "all-in-one net", CMB's position as a leader in the sector was diluted because the "shelf life" of bank products has become shorter and shorter and the uniqueness of those products less and less obvious. CMB was the pioneer; now everybody else follows. But CMB now has to find a new way to enhance its leading position.

CMB discussed its expectations for 2008 like this. "The Company will continue its strategic operational transformation and globalization of management," noted CMB President Ma Weihua. He also noted that the bank would make more effort to expand overseas and in Hong Kong. Qin Xiao, the chairman of CMB, also said in March 2008 that CMB yearned for an acquisition in Hong Kong, when the Wu family said they wanted to sell stakes in Wing Lung Bank.

CMB would have to go global while making stable achievements at home. Its acquisition of a local bank in Hong Kong was a necessary step since Hong Kong is an international financial center that neighbors Shenzhen. "It was only a matter of time until we made the acquisition," said an analyst. The Wu family's sale of Wing Lung Bank also offered a golden opportunity for CMB.

Wing Lung, "the Hot Cake"

Early in March 2008, when the Wu family announced their decision to sell stakes of Wing Lung, CMB was one of the first bidders. Participants in the first round of bidding also included ICBC, CCB, Australia and New Zealand Banking Group Limited (ANZ) and other big names.

ICBC hoped to get its hands on branches of Wing Lung by acquiring the bank, and to make it more competitive in Hong Kong. Michael Smith, the president of ANZ and president of HSBC Asia Pacific, wanted to obtain more space for ANZ to expand in Asia by buying Wing Lung.

ICBC Asia had a relatively stronger footprint in Hong Kong; CCB thought the price of Wing Lung was too high; and Bank of Communications' branches overlapped with of Wing Lung. CMB, meanwhile, only had one branch in Hong Kong, which meant Wing Lung meant much more to CMB than to other banks。