RPT-UPDATE 4-Citigroup wins $3.1 bln battle for Guangdong Bank http://today.reuters.com/news/articleinvesting.aspx?type=companyNews&storyid=332916+16-Nov-2006+RTRS&WTmodLoc=BizArt-L1-CompanyNews-4
Thu Nov 16, 2006
(Repeats story filed late on Nov 16)
(Adds detail about Citigroup's strategy, share prices)
By George Chen and Brian Kelleher
HONG KONG, Nov 16 (Reuters) - A Citigroup-led investment team won a 24.3 billion yuan ($3.1 billion) bid for control of China's Guangdong Development Bank, beating out a group led by France's Societe Generale (SOGN.PA: Quote, Profile, Research) and giving the U.S. bank a bigger foothold in the fast-growing Chinese market.
After a year-and-a-half long bidding process, the Citigroup (C.N: Quote, Profile, Research) team won an 85.6 percent stake in a middle-tier bank with billions of dollars of nonperforming loans on its books but which has more than 500 branches and a presence in Guangdong, China's richest province. "You could say Citigroup is trying to take a bad house in a good neighborhood and fix it up," said John Augustine, chief investment strategist at Fifth Third Asset Management, which owns 2.6 million Citigroup shares.
Citigroup is hoping to generate more profit internationally, and banks globally are scrambling to do business in China, whose economy has turned in double-digit growth every year for the last five years.
Bank of America Corp. (BAC.N: Quote, Profile, Research), Royal Bank of Scotland (RBS.L: Quote, Profile, Research), American Express Co. (AXP.N: Quote, Profile, Research) and Allianz (ALVG.DE: Quote, Profile, Research) have all booked fat profits from stakes in China's three biggest state-run lenders, which have just finished an IPO spree worth more than $42 billion. Citigroup, the largest bank in the U.S., will own 20 percent of Guangdong Development Bank while U.S. technology services company IBM (IBM.N: Quote, Profile, Research) will own 4.74 percent. The remaining members of the consortium, all of which are Chinese, will own 60.85 percent.
Citigroup is expected to have de facto control of the bank, but a source said that decision will not be determined definitively until after the sale closes.
Control is a sensitive issue, with China Life Insurance Co. (2628.HK: Quote, Profile, Research) (LFC.N: Quote, Profile, Research) and China's State Grid Corp. each taking 20 percent stakes in the bank. China's CITIC Investment and Puhua Investment will respectively take 12.85 and 8 percent stakes.
Guangdong Development Bank said it will work with Citigroup on eight areas including risk management, corporate governance, asset and debt management, human resources and financial innovation.
GDB had more than $6 billion in bad debts at the end of last year, according to sources, which makes for a nonperforming loan ratio of 25 percent, versus a country average of 8 percent.
Citigroup's deal comes a day after Beijing released rules for the full opening of its banking sector next month as required by the World Trade Organization.
China, where individuals hold roughly $2 trillion in savings, will allow Citigroup and rivals like HSBC Holdings (HSBA.L: Quote, Profile, Research) (0005.HK: Quote, Profile, Research) to incorporate locally and conduct yuan-currency business with Chinese retail customers for the first time. Citigroup is also negotiating to increase its stake in Shanghai Pudong Development Bank (600000.SS: Quote, Profile, Research) to 20 percent from less than 5 percent, which would give it a sizable presence in two of China's wealthiest business hubs.
Citigroup has focused on smaller banks rather than taking small stakes in state-controlled behemoths after it missed a chance to invest in No. 3 mainland lender China Construction Bank (0939.HK: Quote, Profile, Research), which sold a 9 percent share to Bank of America last year for $3 billion.
Citigroup initially sought to buy 40 percent of GDB in a move that would have circumvented rules capping individual foreign stakes in mainland lenders at 20 percent. Chinese banks are also prohibited from being more than 25 percent foreign-owned.
Citigroup hopes to generate more than half of its profit and revenue outside the United States, up from just over 40 percent now, Chief Executive Charles Prince has said.
The acquisition will boost Citigroup's expenditures in the near term, and by Fifth Third's Augustine's estimates, could take five to ten years to really pay off.
Citigroup is under pressure to boost its revenue while keeping a lid on expense growth.
Citigroup and SocGen resubmitted scaled-down bids at the government's request in June.
SocGen had teamed up with Baoshan Iron and Steel Co. (600019.SS: Quote, Profile, Research) and oil refiner Sinopec Corp. (0386.HK: Quote, Profile, Research).
Deutsche Bank (DBKGn.DE: Quote, Profile, Research) advised GDB during the process.
Citigroup shares rose 19 cents, or 0.38 percent, to close at $50.66 on the New York Stock Exchange. In Paris, SocGen shares fell 0.69 percent to 130.30 euros.
(Additional reporting by Tamora Vidaillet, Tony Munroe, and Dan Wilchins)
(US$=7.87 yuan)
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