Industrial and Commercial Bank of China (ICBC) has entered into a share subscription agreement with SinoPac Financial Holdings in an historic move that signals closer cross-border financial ties between mainland China and Taiwan.
ICBC, the world’s biggest bank by market value, has agreed to subscribe for new shares in either the SinoPac holding company or bank subsidiary, and will result in ICBC owning a 20% stake in one of them. The arrangement is in accordance with the new regulations in Taiwan, according to a statement released to the Hong Kong stock exchange on April 2.
Taiwan’s Financial Supervisory Commission (FSC) said a day earlier that mainland Chinese banks can take 10% stakes in listed financial institutions, 15% in unlisted firms and 20% of banking units of financial holding companies. The previous limit was 5% for all categories.
The decision came after meetings between the FSC and the China Banking Regulatory Commission (CBRC).
“It is a highly significant event,” said a person familiar with the transaction. “It’s the first time that a bank from the People’s Republic of China has taken a stake in a Taiwanese financial institution since the 1949 communist revolution.”
ICBC and SinoPac expect to conduct six main categories of business, namely: renminbi-related activities, international settlement and trade finance, financial markets, cash management, corporate lending and capital markets, including investment banking.
Mainland China is Taiwan’s biggest trading partner, while Taiwan is the seventh-biggest trading partner of the mainland, and cross-strait economic, trade and investment activities have increased.
Taiwan banks began receiving renminbi on the island in February, and also underwriting debt in renminbi, after a clearing agreement was signed last year.
“The transaction will be beneficial to [ICBC] in improving the capability and quality of its services to customers across the strait and will deepen the financial cooperation and promote the economic and trade exchanges across the strait,” according to the ICBC announcement.
The discussions had apparently been underway for several months, and the agreed price is the equivalent of about one times book value, based on June 30 financials. The multiple is likely to be adjusted higher when the deal is completed and this year’s results are released, according to the person.
The price for the transaction will be determined by reference to the net asset value (NAV) set out in the target’s 2012 semi-annual report. The price for subscribing to 20% of the shares of the holding company is NT$23.5 billion ($785 million); and the price for 20% of the shares of the bank is NT$18.7 billion.
After all the necessary regulatory approvals have been obtained, the price will be adjusted to reflect the NAV of the target prior to completion.
Although there hasn’t been official confirmation, ICBC’s 20% stake is likely to translate into a proportionate level of board membership.
The deal is subject to final approval by the CBRC and by the FSC, although clearly the revision of ownership rules suggests that there should be few if any obstacles.
It should be completed by the end of this year, the person added. Although the relaxation of the rules has been announced, legal amendments are still required before the new regime is effective.
ICBC will subscribe for the shares of either the financial holding company or the bank — whichever the amendment that would increase the shareholding limit to 20% applies.
In addition, the arrangement was prepared by the Taiwanese cancellation of OECD-related restrictions that required banks to have several years’ experience of operating branches in OECD countries before they could purchase a holding in a Taiwanese bank.
“This transaction marks a starting point for similar cooperative arrangements, but there are unlikely to be many of them,” said the person.
As the rules stand, banks from the mainland must choose either to have branches in Taiwan or make equity investments in Taiwanese lenders — but not both. Other major Chinese banks, such as China Construction Bank, Bank of Communications and Bank of China already have branches in Taiwan, whereas ICBC does not.
ICBC was advised by Morgan Stanley and ICBC International; SinoPac had no external adviser.