Bank of Communications has agreed to buy 80% of Banco BBM in an all-cash deal, its first overseas acquisition.
The deal announced late Tuesday coincided with Li Keqiang’s visit to Brazil the first stop in the Chinese premier's four-nation South America tour. Li’s visit also precipitated trade agreements with Brazil worth $27 billion. China has been Brazil's largest trading partner since 2009 and Brazil is also China's largest trading partner in Latin America.
The deal will help BoCom expand its businesses in the Brazilian market, and facilitate investment and trading activities between China and Brazil, the Shanghai-headquartered bank said in a statement.
The sale and purchase agreement between BoCom and Banco BBM’s controlling shareholders, the Mariani family, implies an equity value of R$657 million ($216.58 million) with a price to book value of 1.14 times and a price to earnings over the last twelve months of 15.1 times.
BoCom is also trailing in the wake of its peer China Construction Bank Corp. which bought Brazil's Banco Industrial & Comercial in 2013.
Small steps might be all the Chinese banks have appetitie for given their increasing challenges at home. China banks will be confronted this year with the equivalent of a “triple witching” of the margin cycle driven by deposit deregulation; the credit cycle, with unfolding NPLs; and the capital cycle, as regulators demand bigger capital cushions said Sophie Jiang, an analyst at Nomura.
No similar confluence of challenges has been faced by banks in large economies including US, Europe and Japan in the recent past, she noted.
BoCom’s investment in Brazil comes at a time of high and rising indebtedness in the country, growth has fallen below potential for more than three consecutive years. Public banks control 54% of the credit market as a result of years of rapid loan growth driven by government stimulus measures, while private banks remained more conservative.
In business since 1858, Banco BBM has managed to keep its non-performing loan ratios relatively low due to strict underwriting standards Moody’s noted on May 19. In 2014 the loan book amounted to R$1.5 billion, with a problem loan ratio significantly lower than its peers at 0.22% and high reserve coverage of 1357.8%. In addition its loan leverage ratio of 2.6 times shareholders' equity further denotes the bank's conservative position towards credit risk.
However the rating agency also noted the bank's heavy exposure to Brazil’s sugar, alcohol and construction industries, which is however mitigated by a high degree of collateralization. The bank's loan portfolio is relatively concentrated with the 20 largest loans representing 33.2% of total loans in 2014.
BBM has historically preserved a comfortable capital cushion to absorb both expected and unexpected losses in the credit and trading portfolio. In 2014, BBM's total capital ratio was 20.65% and consisted of high quality tangible common equity.
In 2014 net income fell by 10% to R$43.6 million versus 2013, on the back of lower net interest income. On the other hand, loan loss provision expenses in 2014 were R$5.4 million, 88% lower than in 2013.
BoCom agreed to acquire from the selling shareholders 119,626,920 common shares and 30,739,854 preferred shares issued by BBM Bank, representing approximately 80% of the total outstanding shares of BBM Bank.
Based on the book value of BBM Bank as at December 31 the purchase price would be approximately R$525 million ($172.6 million). In addition the remaining shareholders who hold approximately 18% of the remaining shares have a put option to sell to BoCom.
The transaction is expected to close in six months to one year but is conditional on the approval of China Banking Regulatory Commission and Banco Central do Brasil.
Citi is acting as financial advisor to Banco BBM, while Skadden and Barbosa Mussnich & Aragao from Brazil were its legal advisers.