HSBC Buying Into Bank of Communications
Hongkong and Shanghai Banking Corporation (HSBC) is negotiating
to buy into China's Bank of Communications (BoCom). According
to the Financial Times, HSBC will help Bank of Communications
cut its current NPL (non-performing loan) ration of 12.24%
to less than 10% in the coming year. Exact terms are still
under discussion, and likely will not be revealed.
Bank of Communications operating profits in 2003 jumped
34.2% to US$1.1 billion (9.12 billion) yuan. HSBC saw
pre-tax profits rise 53 per cent to $9.37bn in the half
year to the end of June, helped by a full six months'
contribution from Household International, the US consumer
finance business it bought last year, and a strong performance
in Hong Kong. This gives the company an extra buffer to
work with while investing in BoCom.
The deal puts HSBC ahead of other leading investment
banks which are anxious to own a portion of leading Chinese
banks, which are now encumbered with bad loans from the
days when the banks were directed to loan to Chinese state-owned
enterprises by the government.
BoCom has a network of more than 2,700 branches in China.
HSBC worked with Goldman Sachs as its advisor on the deal.
The Chinese bank plans to go public sometime next year,
and by buying into BoCom, HSBC will earn likely earn a
position as an advisor when BoCom goes public.
Even though the Chinese banks are encumbered with bad
loans, and have high NPL ratios, western investment banks
hope to get in and profit from restructuring fees and,
if the banks are in the retail banking business, such
as Citigroup, to benefit from current retail banking relationships.
The trouble with many of the Chinese banks is that in
many cases, the relationships are money-losing relationships.
This is true of the lending to almost all state-owned
enterprises which are making losses.
The Chinese government has been involved in efforts to
reduce NPLs, and have talked about risk management tools,
research and analysis tools, and other ways of reducing
their bad loan portfolios so that they can go public.
The real solution is much more simple, and much more
basic. It involves having senior management who can say
"No" to all previous customers which were performing
poorly and did not repay their loans. The challenge for
the Chinese bank networks is that these changes in mangement
have to go down to the bank manager level, since one undisciplined
bank
manager in an outlying province can make a large amount
of bad loans under the current system.
In HSBC, and all the other banks investing in Chinese
banks, they will have to introduce computer analytical
and human controls to prevent bad loans from continuing
to happen.
In many cases, this will mean ditching old relationships
of the bad kind.
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