October 06, 2005
Credit-Raising A Go-Go
Seems like everybody and his brother is out on the road now trying to sell some bank stock.
China Construction Bank is still in "pre-marketing" (how this is distinguished from "marketing" has always eluded me, and I've done both) for an offering which will raise $7.7bn at the top of the pricing range, but the institutional tranche is already reportedly covered. Even allowing for the prevaricatory nature of all in ECM who speak on such issues....not a bad showing. (that's what MS/CSFB/CICC are calling you about)
Mizuho is taking advantage of the run-up in Japanese bank stocks to push out $4.7bn of shares (not new but held by an older liquidation vehicle) so as to repay past government support. (Nikko/Citi/Mizuho, + MS/ML will be ringing your doorbell on this one)
Lone Star's Tokyo Star Bank (formerly Tokyo Sowa) is also on the road with Japanese investors, looking to raise up to $798m in its IPO. (a Citi/Nikko/CSFB joint, with bookbuilding 10/4-10/14 and pricing 10/17)
ECM Tid-bits: ICICI Bank's Board meets next week to discuss raising additional capital. State-owned competitor Union Bank has already applied to the government for permission to sell 45m new shares. Standard Chartered Bank (Thai) also plans to bolster equity, but with new capital coming exclusively from the parent, you're out of luck if you want any.
October 05, 2005
BNP Paribas Guards its Treasure
BNP ExCo member Alain Papiasse spoke to the SCMP yesterday in Hong Kong, disclaiming any desire on the part of the banking group to follow in the footsteps of RBS, HSBC, or BofA in plunking down large sums of cash on the mainland:
"The only thing that the group is not comfortable with is spending billions to invest in a small stake of anything," said Mr Papiasse. "If we are not in control, then we prefer a moderate investment."
He said there were now two types of foreign banks looking for opportunities on the mainland.
"The first type would try to invest a lot of money for a very small stake in a large national bank, while the second type would rather invest a small amount in a small regional bank. We definitely belong to the second group."
BNP further disclosed its interest in online (retail) broking in both China and India, and said that a China bank deal (thought as we have previously highlighted to be Nanjing City Commercial Bank) could be announced "within weeks."
September 29, 2005
BEA Keeps Its Powder Dry in China, But Won't Get Left Out
BEA says that it has been circling several mainland banks, but without success so far. GM Raymond Yu feels that it's early days in China, and doesn't seem to feel any pressure to be a first mover - in fact quite the opposite:
"There's no need to worry, each foreign bank can only partner with two local players. HSBC is out of the game," he said.
The Standard article notes that BEA would like to buy 19.9% (the maximum) stakes in two city commercial banks: one in the north and one in the south, but so far seems to have lost out in the bidding for Nanjing CCB (likely to BNP) and Minsheng Bank.
More China Bank M&A Action: GE Capital and Shenzhen Development Bank
GE Capital has joined Newbridge by taking a 7% stake in Shenzhen Development Bank, the first such China investment for the global finance company. We suspect that this investment will take the form of approximately $100m in primary shares, which will bolster the bank's capital. As Newbridge already controls close to 18% of SDB, it will also mean the bank is effectively at its 25% foreign ownership limit for now, although we also expect that this could be more flexible for SDB given that Newbridge already has effective management control.
Note that per GE's last presentation on Asia, they actually seem more focused on India and SE Asia in the consumer finance arena, meaning that we might see more deals in those markets soon.
September 28, 2005
Taureaux dans un magasin de porcelaine, redux
Even as Credit Suisse was dropping out as an investor in CCB, arch-rival UBS was concluding a $500m investment in Bank of China, alongside larger investors RBS (with co-consortium investors Merrill Lynch and Li Ka-Shing) and Temasek. UBS is said to have a "strategic arrangement" with BOC in the areas of investment banking and securities, presumably one different from the "exclusive strategic partnership" it has with RBS and general "collaboration" and "cooperation" which comes along with Temasek's also-"strategic" investment.
UBS also today announced plans to purchase 20% of of Beijing Securities for approximately $210 million, investing alongside the IFC.
Meanwhile, having been cut out by Deutsche in its bid for a stake in Huaxia Bank, BNP confirms that it is close to an investment in Nanjing City Commercial Bank, said to be in the $100m range. This investment would give the multi-national (but yet very French) banking group an 18.5% stake in the Chinese institution, which The Banker calls "a relatively well-run commercial lender" with low NPLs.
CS pulls out of CCB Investment, Stays in Underwriting Syndicate
China Construction Bank has begun pre-marketing with a full complement of underwriters - but without a planned $500m investment by Credit Suisse. A tip 'o the hat to our friends at FinanceAsia who scooped the story (even got credit from the Journal)
CCB's decision to drop CSFB's proposed investment was made last Thursday after it became clear the IPO would otherwise get delayed. This is because the only 'connected party' a bookrunner can technically allocate stock to is its own asset management arm unless it has received special regulatory approval.
CSFB, however, had been mandated late in the IPO process as a replacement for Citigroup, which had decided not to make a strategic investment in CCB and consequently been dropped as a bookrunner. As such, CSFB had not yet received special approval from the stock exchange by the time the IPO reached the final stages of listing committee approval and CCB did not want to wait around to get it.
At the same time, dropping CSFB was not really an option given its presence would mollify those members of Hong Kong's listing hearing committee who had been voicing concerns about the independence of fellow lead managers CICC and Morgan Stanley, both of whom have strong links to CCB.
As you may have read here previously, we think it somewhat odd that an underwriter who is being paid tens of millions of dollars could ever be considered "independent." Isn't that why the underwriters are not permitted to publish research during the blackout period? Who listens to brokers anyway?
What investors might find interesting is that, given a choice between being an investor and being an underwriter, CS would rather be an underwriter. What does that say about expected returns?
September 21, 2005
Deutsche Pips StanChart for 10% Huaxia Stake
Deutsche Bank is set to be the lead player in a consortium which will acquire almost 14% of Huaxia Bank for approximately $330m. Deutsche will have a 10% stake, with financial partners taking up the remainder, according to preliminary reports. DB was previously a reported bidder for a stake in Bank of Beijing which was sold to mighty Dutch masters ING Group. In tying up with Huaxia, DB beats out rumoured partner Standard Chartered, who will have to be content with their 20% of start-up Bohai Bank for now.
In an unrelated but comically-juxtaposed news item, DB CEO Josef Ackermann said today that the bank will focus on "organic growth" rather than acquisitions.
September 19, 2005
Delta Asia Run Wanes
Banco Delta Asia SARL appears to have weathered the storm over its money-laundering activities, at least for the moment, with the press reporting this morning that no further outflow of deposits has been seen, and even that some moneys are returning.
From today's SCMP:
Stanley Au Chong-kit, chairman of the Delta Asia Financial Group, visited the Lisboa branch at 2pm, shaking hands with each staff member and greeting customers.
"Their six-party talks [on North Korea's nuclear programme] failed, so they vented their frustration at me," Mr Au joked with one customer, referring to the US claims.
Customer confidence had been restored, said Mr Au, who added that "several tens of million dollars" had been redeposited with the bank. "I believe the bank run has come to an end," he said.
However, the bank will still be run temporarily by two administrators appointed by the Macau MA, and faces being cut off from its correspondent banking relationships if the US can prove its case.
September 18, 2005
China May Allow Higher Foreign Ownership of Banks
"We are working on a proposal how we can lift the cap," [China Bank Regulatory Commission Chairman Liu Mingkang] told reporters in Beijing on Monday. "We will have future changes and the door will be open much wider."
Current regulations permit 25% collective ownership by foreigners of a single institutions, with no single shareholder permitted to hold more than 19.9%.
However, there have been signals in the past that this limit might only apply to the more strategic national banks, with some of the more undercapitalized city commercial banks having supposedly been given permission to sell up to 80% stakes to foreigners in order to raise funds for NPL write-offs.
Expect no change, however, in the actual control over the big four state banks, which will remain at least 51% owned, and entirely controlled by, the central government.
Delta Asia Money Laundering Inquiry Spreads; Sparks Bank Run
The investigation into money laundering and potential terrorism links at Macanese banks has begun to have an impact. On Thursday the U.S. Treasury Department formally designated Banco Delta Asia SARL as a "primary money laundering concern." News of the sanction prompted a run on the bank, with almost 10% of deposits withdrawn on Friday and Saturday and additional cash supplies being shipped in from Hong Kong to meet demand.
More below the fold:
From the Treasury finding:
"Banco Delta Asia has been a willing pawn for the North Korean government to engage in corrupt financial activities through Macau, a region that needs significant improvement in its money laundering controls, said Stuart Levey, the Treasury's Under Secretary for Terrorism and Financial Intelligence (TFI). "By invoking our USA PATRIOT Act authorities, we are working to protect U.S. financial institutions while warning the global community of the illicit financial threat posed by Banco Delta Asia."
In conjunction with this finding, Treasury's Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that, if adopted as final, will prohibit U.S. financial institutions from directly or indirectly establishing, maintaining, administering or managing any correspondent account in the United States for or on behalf of Banco Delta Asia.
Such a finding, replete with specific allegations, is very unusual, to the point where it would be very surprising if there is not substantial evidence to back it up.
Note for the record that Bank Chairman and controlling shareholder Stanley Au has called the allegations a "ridiculous joke."
Regardless of the truth of the allegations, the government of the Macau SAR is taking the situation very seriously, knowing that a bank run could lead to the collapse of the bank or even undermine the entire financial system. On Saturday, the Macau Chief Executive appointed two administrators to oversee the bank and "participate in [its] administration," but pleaded with the public not to put credence in allegations, but to wait for authoritative findings.
Remember also that outstanding investigations of Seng Heng Bank and Bank of China's Macau operations on the same grounds are also proceeding - if similar charges are levied against these institutions the fallout would be much more serious.
Has Macau been lax in enforcing anti-money-laundering ordinances and controls?
While the Monetary Authority is generally considered a respectable bank regulator, note that the IMF's last review of financial systems regulation and supervision in Macau found the AMCM "materially non-compliant" in enforcing anti-money-laundering principles.
September 12, 2005
CCB Listing Technicalities Abound
CCB seems to be winning some and losing some in its pre-listing discussions with Hong Kong securities regulators. On the positive side, CCB appears to have won waivers from the standard HK listing rules which set aside a minimum 10% of IPOs for retail investors, and permit a clawback in the case of especially hot deals which gives retail punters up to 50% of shares on offer. It's certainly good that we are worrying about CCB being potentially 100x oversubscribed...
On the downside, the stock exchange listing committee has "expressed concerns about the independence of the bank's listing sponsors, all of whom are closely related to the mainland lender." Of the current lead underwriters, one (CCBIC) is owned by the bank, one (CICC) is a jv between the bank and Morgan Stanley, and the other one is Morgan Stanley itself.
According to Listing Rule 3A, a sponsor cannot have a current business relationship with the new applicant, which "would be reasonably considered to affect the sponsor's independence in performing its duties, or might reasonably give rise to a perception that the sponsor's independence would be so affected".
I suppose that several hundred million dollars in fees (on a $5-7bn offering) isn't enough to affect the good judgement of the sponsors. Haven't we already learned how craven Morgan Stanley can be even when it's not affiliated with a company?
The major concern is that this "issue" might delay the offering:
In order to resolve the issue, it may be necessary for the Hong Kong Exchanges and Clearing's listing committee to hold a special policy meeting in order to seek opinions from all members. If members do not agree to a special meeting CCB's planned US$5 billion to US$7 billion initial public offering, due to kick off next month, seems likely to be delayed as the next scheduled policy meeting is also in October.
The SCMP floats the idea that this problem could be solved by adding CSFB to the list of underwriters, despite the fact that Credit Suisse is still negotiating a $500m investment in CCB. Pardon us if we can't see the added independence here.
September 08, 2005
Bank of China Probed by US Investigators
The WSJ reported this afternoon that Bank of China and two Macanese banks - Banco Delta Asia SARL and Seng Heng Bank - are under investigation due to alleged connections with North Korea which involve money laundering, counterfeiting, drugs, and arms sales.
Press reports connect the investigation, which has evidently been ongoing for several years, to the recent seizure of so-called "supernotes" (high-quality counterfeit US currency) in the US and Taiwan.
This is a repeat investigation for Delta Asia, which has been under the microscope for a decade. The WSJ article described Delta Asia as "a top candidate for being placed on a Treasury Department blacklist" of banks facilitating money laundering, which would deal a heavy and possibly crippling blow to the bank's business. Likewise, Seng Heng (no relation to Hang Seng), controlled by gambling tycoon Stanley Ho, will be looked at closely given Mr. Ho's close ties to the North Korean government.
Are the allegations true? While we have no direct knowledge, it would be incredible if banks in Macau have not been facilitating money laundering, given the amount of illicit cash that washes into the casinos and various less-savoury schemes in the territory. As for Bank of China, its internal controls have been so porous that it is easy to believe that some part of the bank was facilitating money laundering, if only unintentionally.
What are the prospective penalties? Stiff:
Penalties for money laundering and terrorist financing can be severe. A person convicted of money laundering can face up to 20 years in prison and a fine of up to $500,000.11 Any property involved in a transaction or traceable to the proceeds of the criminal activity, including property such as loan collateral, personal property, and, under certain conditions, entire bank accounts (even if some of the money in the account is legitimate), may be subject to forfeiture. Pursuant to various statutes, banks and individuals may incur criminal and civil liability for violating AML and terrorist financing laws. For instance, pursuant to 18 USC 1956 and 1957, the Department of Justice may bring criminal actions for money laundering that may include criminal fines, imprisonment, and forfeiture actions. In addition, banks risk losing their charters, and bank employees risk being removed and barred from banking.
Moreover, there are criminal penalties for willful violations of the BSA and its implementing regulations under 31 USC 5322 and for structuring transactions to evade BSA reporting requirements under 31 USC 5324(d). For example, a person, including a bank employee, willfully violating the BSA or its implementing regulations is subject to a criminal fine of up to $250,000 or five years in prison, or both. A person who commits such a violation while violating another U.S. law, or engaging in a pattern of criminal activity, is subject to a fine of up to $500,000 or ten years in prison, or both. A bank that violates certain BSA provisions, including 31 U SC 5318(i) or (j), or special measures imposed under 31 U SC 5318A, faces criminal money penalties up to the greater of $1 million or twice the value of the transaction.
- FFIEC Bank Secrecy Act Examination Manual (emphasis ours)
While the US can't revoke the charter of a foreign bank, it can revoke its license to operate in the US. Neither of the Macau-based banks has a branch or rep office in the US, so they are safe on that count, but BOC most assuredly does and so is vulnerable.
In addition, if US authorities prove their case to international regulators, they can effectively cut off rogue banks from access to the international finance system by preventing interbank transfers and payments, access to clearing, and correspondent banking.
Although regulators take this financial crime more seriously than almost any other (remember that even the very well-connected Riggs Bank ran afoul of the regulations and was forced into a sale), cutting-off BOC from international markets would be seen as a very aggressive diplomatic act. Unless there is much more to the story than has yet been revealed, this will not happen.
However, the bank will most likely be fined several hundred million dollars, and be restricted in its activities in the US for some time. It is certainly not good timing for BOC's planned IPO. I'm sure that RBS has its best anti-money-laundering team on a plane right now to see if they can help the situation.
As for the two smaller banks, they will be under heavy pressure to sell out lest they taint the entire market. I would not be suprised to see both merged into Hong Kong banks by year-end. A change of ownership (along with smaller fines) would probably propitiate US regulators, and the PBOC will (my guess) freely flay the small banks so as to demonstrate its bona fides and be able to cut a good deal for BOC, which is much more strategic to them.
September 06, 2005
Official Bohai Launch
As expected, StanChart announced in Beijing today that it will invest $123m for 19.9% of the newly formed Bohai Bank, which will be based in Tianjin. The official signing ceremony was attended by PM Tony Blair, Premier Wen Jiabao, and SCB Chairman Bryan Sanderson.
BOC NPLs Going the Wrong Way
Perhaps, but why are loans still going bad at BOC even after the extraordinary write-offs taken to prepare the bank for sale? Presumably the RBS/Merrill Lynch consortium was aware of this, but it will be interesting to see what the IPO prospectus has to say about it. If BOC lists in the fourth quarter we may never see anything later than June 30 financials.
September 02, 2005
Bohai Bank gets ready to go
Planned new national bank Bohai, which was reportedly approved in April, will unveil its initial organization plans in Beijing next Tuesday, per DJN. Tianjin-based Bohai is expected to gain credibility (and cash) from 19.9% founding shareholder StanChart.
Taureau dans un magasin de porcelaine?
BNP Paribas has revealed that it is the latest in a string of global banks chasing after stakes in Chinese institutions, having earmarked some of its €2bn a year war chest for China acquisitions. This morning's Standard has them looking at Huaxia Bank, along with Deutsche, SMFG, DBS, and SocGen. Tulips, anyone?
September 01, 2005
As all of the major Chinese banks continue to choose partners and move towards the dance floor, ICBC has signed an MOU to sell a 10% stake in the bank to a consortium consisting of Goldman Sachs Private Equity, American Express, and Allianz. The FT hails the insertion of an "escape clause" in the deal which would let the consortium get out if ICBC's numbers are not as reported.....suspicious bastards!
ICBC also claims to have "completed its disposal" of bad assets after its most recent sale. We'd take the other side of that bet...
Posted by The Banker at 06:02 PM
Bulls in the China Shop
Temasek spreads its chips all over the table, adding a 10% (pre-ipo) stake in Bank of China to its existing portfolio of shares in China Construction Bank (initially 5.1%), China Minsheng Bank (4.6%), and of course its de-facto controlling stake in DBS, which has major operations in Hong Kong and 7 offices in the Mainland.
With this spree totalling at least $4.8bn so far, Temasek's banking team seems far from tapped out, and is still rumored in other FIG cicles to be a serious rival for the Carlyle/Prudential consortium in bidding for a major stake in China Pacific Insurance Group.
The WSJ notes:
...Temasek's style historically has been to shy away from the sort of hands-on corporate restructuring that, say, private-equity funds engage in to try to boost the value of their investments. And Temasek, with a staff of about 200, will be hard-pressed to transfer the sort of modern management know-how that a larger institution like Bank of America or HSBC Holdings PLC boasts.