ICBC comes out of the cold

ICBC''s purchase of Union Bank could be the thin edge of the wedge for Hong Kong''s banks as Chinese banks seek international expertise

The purchase of 53% of Union Bank in Hong Kong by the mainland's Industrial and Commercial Bank of China (ICBC) comes as no surprise. ICBC has been in the open market for the last two months buying nearly 7% of the Hong Kong-listed bank. However, the move by ICBC could be a precursor to wider changes in theáHong Kong banking sector.

ICBC is buying the stake in Union Bank from fellow state-owned company China Merchants. In this regard, the purchase is little more than asset shifting by the State Council in Beijing between its various organs of state. Admittedly it probably makes sense for a bank to hold shares in another bank rather than have a trading company control a bank, but other than that one can only guess at the reasons behind the move in Beijing.

One explanation is that as China's WTO entry looms, Chinese banks are seeking to expand outside their protected domestic market. However, in this deal, ICBC and Union Bank will retain separate brands, identities and operations. The only operational synergy seems to be that ICBC will channel some extra trade finance to Union Bank's way.

Local market

Nevertheless, it seems that ICBC is using this deal as a way of buying into international practices. It will be using its stake in Union Bank to get into the local banking market in Hong Kong and in the process into the international banking fraternity.

"With this deal, ICBC is buying a presence in Hong Kong," says Simon Maughan, banking analyst at Lehman Brothers in Hong Kong. "It's not a big presence, nor is it a powerful presence, but it is a sign that ICBC is coming out into the big wide world."

The price that ICBC paid for the bank is HK$7.52 a share, which represents a 6.66% premium to Union Bank's previous day's close. In total, ICBC is paying HK$3.1 billion for 239.98 million shares. This represents a valuation of 1.4 times the adjusted book value of the bank - a price consistent with recent mergers in the banking sector.

ICBC's move could be the start of a new competitive trend for Hong Kong's banks. Many are already feeling the pressure from two threats to their traditional way of business - internet technology and next year's interest rate deregulation. If China's banks now start gobbling them up so they can learn how the real world does banking, it could be an even more volatile time for the sector.

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