SACRED DRAGONS

Lex 2008-10-17

There are no sacred cows, incoming banking bosses insist, but will there be sacred dragons? Foreign banks, including Royal Bank of Scotland and Bank of America, shelled out an aggregate $9bn or so on stakes in Chinese banks that today are worth some $40bn. That could come in quite handy right now. Serendipitously, lock-up periods on these stakes – acquired three years ago when China began partially privatising its big lenders – begin to expire from this month. Leaving aside the concern that Beijing did not whittle back state ownership in order to be replaced by Whitehall or Washington, there are other good reasons for foreign banks to divest their stakes.
Prices, for example, are roughly half the peak levels of about a year ago but the outlook suggests they are still some way off the bottom. Decelerating economic growth in China will feed through to slower loan growth and deteriorating asset quality. Last month's cut in interest rates affected only lending rates, thus eroding net interest margins. Even when both rates are cut, as in the most recent move, that hits government bond yields and hence the banks' treasury returns. As pertinently, Chinese savers are shifting more money into higher-yielding term deposits, again increasing funding costs.
In the meantime, China itself is becoming more antsy about foreign involvement in the financial sector. Following the partial nationalisation and distressed sale of Fortis, the European insurer that is 5 per cent owned by Ping An, Beijing is closely monitoring foreign partners in joint ventures. Ultimately there is just one reason for foreigners to stay: the promise of access to what will, one day, be the world's biggest economy. Sure, there is a graveyard of “strategic” partners who supplied capital and skills but received little in return, but hope springs eternal. As gambles go, it's probably a decent one. Exiting just as the domestic sector hits tougher times is no way to win friends in China.