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HKU751
GERALD YONG GAO
JIANGYONG LU
HUNG-GAY FUNG
MINSHENG BANK: PENETRATING THE US
MARKET THROUGH ACQUISITION
Founded in 1996, China Minsheng Banking Corporation Limited (Minsheng) was the first private commercial bank in China. By 2006, Minsheng had acquired almost US$130 billion in total assets and established nearly 330 banking offices across the nation.1 One of the worlds most respected financial publications, The Banker magazine, had consistently praised Minshengs development, ranking it number 310 in its top 1,000 business banks in the world in 2004, number 287 in 2005, and number 247 in 2006.2 In early March 2008, Minsheng obtained the green light from the China Banking Regulatory Commission to buy a 4.9% stake in US-based banking holding company UCBH Holdings, Inc (UCBH) for US$95.7
million. 3 The deal, which was first reported in October 2007, would eventually bring Minshengs stake in UCBH to 9.9%, totalling around US$200 million.4 The acquisition not only distinguished Minsheng as the first Chinese mainland institution to invest in a US bank, but was also viewed as a milestone for Chinese banks to expand into the US and international markets. On the flip side, UCBH would soon use this opportunity to make its own moves into China, leveraging its affiliation with Minsheng to acquire other Chinese banks. Would UCBHs agenda in China hamstring Minshengs global expansion? How would Minsheng address other issues, such as post-acquisition integration and international banking regulations?
Should other Chinese banks follow suit and go on a shopping spree of foreign banks?
Minsheng Bank
Given Chinas tight restrictions on the banking sector, Minshengs founding as a non-state-owned commercial bank in Beijing on 12 January 1996 was hailed as a breakthrough.
Focusing on the richer, coastal areas of China, Minsheng offered a wide range of financial 1 Minsheng (2007) Annual Report. US$1 = Rmb 7.10140 on 10 March 2008.
2?????? (2008)?????????http://www.cmbc.com.cn/about/jianjie.shtml (? 2008? 3? 10???)?
[Minsheng (2008) Brief Profile, http://www.cmbc.com.cn/about/jianjie.shtml (accessed 10 March 2008).]
3 SinoCast China Business Daily News (4 March 2008) China Entitles Minsheng Banking to Buy 4.9% in UCBH.
4 Tucker, S. (9 October 2007) China Minsheng in Pioneer US Deal, Financial Times.
Ricky Lai prepared this case under the supervision of Dr Gerald Yong Gao, Dr Jiangyong Lu and Prof Hung-gay Fung for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.
© 2008 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwise (including the internet)without the permission of The University of Hong Kong.
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Minsheng Bank: Penetrating the US market through Acquisition
services [see Exhibit 1] and was the first to prepare its financial statements in accordance with international accounting regulations, with PricewaterhouseCoopers as its auditor. 5
Minsheng also differed from state-owned banks and other Chinese banks in origin and ownership as a standard joint-stock financial institution set up strictly in accordance with the Company Law and the Commercial Bank Law.
Minsheng listed its A-shares on the Shanghai Stock Exchange on 19 December 2000. On 18
March 2003, Minsheng issued US$563 million worth of convertible corporate bonds. A further US$817 million worth of subordinated bonds was issued on 8 November 2004 on the inter-bank bond market,6 making Minsheng the first commercial bank in China to issue subordinated bonds through private placement. Its achievement was further enhanced on 26
October 2005 when it became the first commercial bank in China to accomplish a shares merger reform and establish itself as a successful model for Chinas capital market reform.
Minsheng had centralised its business processing systems and adopted a net profit-oriented performance evaluation and incentive mechanism for each business unit. It also attracted and retained talent by enhancing its incentive system through a project named Three Cards, which promoted employees salaries, welfare and training, making Minsheng one of the most attractive employers in the industry. The independent credit assessment framework also contributed to a low non-performing loan ratio of below 1.5% (1.22% as of the end of 2007),7
one of the lowest in the nation. In addition, Minsheng had started to adopt strategic business unit mechanisms in its most important business lines.
With a young and dynamic management team, Minsheng had charted successes in the Chinese banking sector, winning numerous domestic and international awards, including nods from The Banker and Forbes magazines. In tandem with the recent trend among Chinese banks of moving into insurance and investment banking businesses, Minsheng had maintained considerable growth in intermediary business by proactively exploring non-traditional business fields: innovating investment banking products; realising fast growth in credit card issuance, transaction volume and operational income; reinforcing e-banking and asset custody business, which had significantly increased overall income; and accelerating preparation and implementation of pilot programs such as small- and medium-sized enterprise (SME) financing, derivatives products, funds and financial leasing business.8
United Commercial Bank
Through its subsidiary, United Commercial Bank, UCBH operated a leading bank in the US, serving Chinese communities and American companies doing business throughout China.
With assets of US$12 billion as of 31 December 2007, UCBH maintained 70 locations in the US (mostly in California), Hong Kong, Taiwan and the Chinese cities Shanghai, Shantou, Beijing, Guangzhou and Shenzhen.
Headquartered in San Francisco, UCBH provided not only commercial banking services for SMEs and professionals in a variety of industries, but also consumer and private banking services for individuals. It engaged in a full range of lending activities, including commercial real estate and construction loans, commercial credit facilities, international trade finance, 5 Minsheng (2000) Annual Report.
6 Minsheng (10 August 2004) stated in an announcement filing with the Shanghai Stock Exchange that the funds collected from the subordinated bonds issuance were to be used to substantiate the companys capital.??????? (2004)??????
????????http://www.sse.com.cn/cs/zhs/scfw/gg/ssgs/2004-08-10/600016_20040810_1.pdf?? 4? (? 2008? 4
? 2???)?[Shanghai Stock Exchange (2004) Notice of Minsheng Bank Board Decision, p. 4 (accessed 2 April 2008).]
7 Minsheng (2007) Annual Report, p. 7.
8 Minsheng (October 2007) Interim Report 2007, p. 19.
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cash management, private client services, loans guaranteed by the US Small Business Administration, residential mortgages, home equity lines of credit and online banking services for businesses and consumers. In terms of service and clientele profiles, UCBH and Minsheng were considered similar.
United Commercial Bank started out as United Federal Savings and Loan Association (UFSLA) in 1974 and served the financial needs of the Chinese community in San Francisco. As the Chinese-American population grew significantly and expanded into new communities throughout California, UFSLA became United Savings Bank, F.S.B. and began providing state-wide banking services. In 1998, reflecting a rapidly growing focus on their commercial banking capabilities, the charter was converted to become United Commercial Bank.
On 11 January 2007, UCBH announced that, for approximately US$131 million, it would acquire The Chinese American Bank, which had a number of strategic branch locations in the state of New York. The acquisition was completed in May 2007, expanding UCBHs foothold in the New York metropolitan area.
Acquisition of Business Development Bank
On 27 March 2007, it was announced that UCBH would acquire 100% of the equity interest of Shanghai-based Business Development Bank (BDB) in a US$205 million cash transaction. After the acquisition, Business Development Bank would operate as a subsidiary of UCBH under the UCB brand.9
Established in 1992 as the first wholly foreign-owned bank in China, BDB operated banking offices in Shantou, Beijing and Guangzhou, offering a range of financial products and services to SMEs. In particular, it was licensed to conduct renminbi and foreign currency business with foreign-invested enterprises and individuals and planned to apply for an expanded license to conduct a full scope of renminbi business with all types of customers, including domestic companies and individuals. Following the acquisition, UCBH would take over this application process as part of the merger application to the China Banking Regulatory Commission.
We are extremely pleased with this acquisition in China, especially after two years of extensive research on different options and opportunities. The proposed acquisition of BDB provides UCBH with an immediate and well-organised infrastructure to accelerate the implementation of our Greater China strategy. In addition to its licenses to conduct different types of business throughout China, BDB has an experienced management team in place and has built a good foundation in its credit risk management, IT, operations and systems. This acquisition is expected to save us at least 45
years in achieving our expansion plans in China, compared to a de novo
incorporation of a new foreign-funded bank in China.
9 UCBH (27 March 2007) UCBH Holdings, Inc. Announces that United Commercial Bank Has Signed Definitive Agreements to Acquire 100% of Shanghai-Based Business Development Bank Ltd., Press Releases.
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After the completion of this transaction, we will be able to provide full-banking services to our customers who are doing business in China. We project significant growth opportunities in China from the local SMEs doing business with US companies. As a result of a strong banking platform in the Greater China region, we also anticipate significant growth in our
commercial banking and trade finance business in the domestic market, as we target companies in the US that are doing business in China. Over the next three years following this acquisition, we plan to add 23 more branches in other strategic locations in China, which will further enhance our
capabilities to tap into China’s market potentials, particularly the SMEs, for even greater trade finance opportunities. 10
– Thomas S. Wu, chairman, president and CEO of UCBH
As of the end of 2006, BDB had US$217 million in total assets, US$188 million in loans, US$26 million in deposits and US$76 million in equity. 11 The acquisition was declared completed in early December 2007.12
Chinas Banking Industry and Its Reforms
Historically isolated and tightly regulated, Chinas banking system had undergone significant changes in the previous two decades, with banks gradually adopting the standards of their international counterparts. Nevertheless, the governments direct control over the banking industry remained strong even as banks had gained a certain degree of market autonomy. The gradual relaxation was accelerated by Chinas accession to the World Trade Organization (WTO), which had been pushing the Chinese government to significantly open the industry to foreign participation.
Supervisory Bodies
Chinas central bank, The Peoples Bank of China (PBOC), was responsible for formulating and implementing the nations monetary policy. The PBOC maintained the banking sectors payment, clearing and settlement systems and managed official foreign exchange and gold reserves. It also oversaw the State Administration of Foreign Exchange in setting foreign exchange policies.
Acting under the guidance of the State Council, the PBOC exercised full autonomy in applying monetary instruments, including setting interest rates for commercial banks and trading in government bonds. The PBOC reported to the State Council on its decisions concerning the annual money supply, interest rates, exchange rates and other important issues specified for approval by the State Council. It was also obliged to submit work reports to the Standing Committee of the National Peoples Congress, Chinas de facto legislative body, on the conduct of monetary policy and the performance of the financial industry. All capital of the PBOC was invested and owned by the state.
On 28 April 2003, the China Banking Regulatory Commission (CBRC) was officially launched to take over the supervisory role of the PBOC. The goal of the landmark reform was 10 UCBH (27 March 2007) UCBH Holdings, Inc. Announces that United Commercial Bank Has Signed Definitive Agreements to Acquire 100% of Shanghai-Based Business Development Bank Ltd., Press Releases.
11 UCBH (26 November 2007) UCBH Holdings, Inc. Announces Receipt of All Necessary Regulatory Approvals for the Acquisition of Shanghai-Based Business Development Bank Ltd., Press Releases.
12 UCBH (11 December 2007) UCBH Holdings, Inc. Completes Acquisition of Shanghai-Based Business Development Bank Ltd., Press Releases.
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to improve the efficiency and focus of supervision over the Chinese banking industry and to allow the PBOC to concentrate on the larger economy and currency policy [see Exhibit 2 for a list of CBRCs functions].
Domestic Key Players
State-Owned Commercial Banks
In 1995, the Chinese government passed the Commercial Bank Law to commercialise the operations of the four state-owned banks, the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank and the Agricultural Bank of China, collectively dubbed the big four of the Chinese banking industry.
Industrial and Commercial Bank of China (ICBC) was the largest bank in China by total assets, number of employees and customer base. It was also one the worlds largest banks by market value and one of the worlds top ten by assets. ICBC differentiated itself from the other Chinese state-owned commercial banks by being second in foreign exchange business and first in renminbi clearing business. It was traditionally a major supplier of funds to Chinas urban areas and manufacturing sector. On 30 December 2006, ICBC signed an agreement of acquisition with the directors of Bank Halim Indonesia to acquire 90% of its shares. This was ICBCs first international bank acquisition and was also its first entrance into the foreign market by means of acquisition. Meanwhile, Hong Kong-based ICBC (Asia) Co.
Ltd was the largest ICBC business unit outside China.
Bank of China (BOC) was Chinas oldest bank, tracing its roots to 1905, in the final years of the Qing dynasty. It specialised in foreign exchange transactions and trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed on the Hong Kong Stock Exchange. The US$2.8 billion offering was over-subscribed by 7.5 times, paving the way for international investment in Chinas banking industry and subsequent industry reforms.
China Construction Bank (CCB) was a specialist in medium- to long-term credit for long-term specialised projects, such as infrastructure projects and urban housing development. It had a close relationship with Bank of America, starting with an agreement in mid-2005 that allowed Bank of America to progressively invest in CCB, up to a 19.9% cap. This was followed by CCBs 100% acquisition of Bank of America (Asia), a subsidiary of Bank of America, in October 2006.
Agricultural Bank of China (ABC), as its name suggests, originally specialised in providing financing to Chinas agricultural sector and offered wholesale and retail banking services to farmers, township and village enterprises and other rural institutions. It had since diverged to a range of financial services in renminbi and foreign currencies, with a high penetration in the retail market with its extensive branch network.
Policy Banks
In 1994, the Chinese government established three policy banks: the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.
These banks exercised Chinas macroeconomic policies and carried out macro-control functions in support of national economic development and strategic structural readjustment.
In effect, they took over the government-directed spending functions of the four state-owned commercial banks, providing financing for key state-invested projects and infrastructure construction and for basic and pillar industries. In particular, the Agricultural Development Bank of China focused on agricultural development projects in rural areas, the China 5
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Development Bank specialised in infrastructure financing and the Export-Import Bank of China engaged primarily in trade financing.
Second-Tier Commercial Banks
In addition to the big four state-owned commercial banks, there were smaller commercial banks in China. The largest ones in this group included the Bank of Communications, China CITIC Bank, China Everbright Bank, Hua Xia Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank and Minsheng. The second-tier banks, with their relatively short history, were generally in better shape than the big four, with higher asset quality and profitability and lower non-performing loan ratios.
Trust and Investment Corporations
In the mid-1980s, the Chinese government established a group of agencies known as the international trust and investment corporations (ITICs) to engage in various forms of merchant and investment banking activities. One of the aims in setting up the ITICs was to attract foreign capital and technologies, thereby accelerating Chinas opening up to the international community. 13 However, many of the 240 or so ITICs experienced severe liquidity problems following the bankruptcy of the Guangdong International Trust and Investment Corporation in late 1998. The largest surviving ITIC was China International Trust and Investment Corporation (CITIC), which owned the second-tier commercial bank, China CITIC Bank.
Reforms in the Chinese Banking Industry
Since the economic reform that began in 1979, the Chinese government had been wary of the need to reform the banking industry to cope with economic development and internationalisation. In 1994, the PBOC ceased handling credit and savings business to concentrate on central bank functions through macro-control and supervision of the banking system. The credit and savings business was transferred to the big four banks, though not until 1995, when the Commercial Bank Law was passed to create a legal basis for changing the specialised state banks to state-owned commercial banks.
However, years of government-directed lending with virtually no credit assessment had raked in a large amount of non-performing loans in the Chinese banking system. In 1999, four asset management companies were established to repackage the non-performing loans into viable assets and sell them off to investors. The CBRCs data showed that non-performing loans accounted for 19.6% of total lending in the first half of 2003.14 By the end of 2007, the figure had dropped to 6.2%.15
Apart from institutional-level reforms, the PBOC had encouraged banks to diversify their portfolios by raising the share of their services to the private sector and individual consumers.
A personal credit rating system was launched in Shanghai in July 2000 for the assessment of consumer credit risk and the setting of ratings standards