Wang Hongzhang has been travelling. Earlier this month the man who became chair of China Construction Bank at the start of the year was in Vladivostok for an Asia-Pacific conference. Last week he was in Luxembourg and London.
The message is clear. China’s second biggest lender by assets is looking abroad like never before, keen to catch – and even overtake – its bigger local rival, Industrial and Commercial Bank of China, in terms of international profile.
If CCB fulfilled its ambition of spending as much as Rmb100bn ($15.8bn) on a foreign acquisition, it would be nearly triple the size of the biggest ever overseas deal by a Chinese bank. ICBC paid $5.5bn in 2007 for a 20 per cent stake in South Africa’s Standard Bank.
Just as significant as the scale of the ambition is its focus. Analysts have long forecast that China’s banks could take advantage of the relative cheapness of financial assets in the US and Europe, in the midst of the financial crisis. But so far there has been no real action to speak of.
Now, though, CCB seems determined to grasp the nettle. Wang, a former top official at China’s central bank, is convinced that European policymakers have brought the eurozone crisis under control. “We are quite confident that all measures are being taken by governments and the European Central Bank to solve the European crisis,” he says.
And progress is sufficient to make the region as a whole an attractive place to invest, he adds. “Opportunities in Europe are critical for the development of the bank… We believe the European economy is still very strong. As the Chinese proverb says: ‘A starved camel is still bigger than a horse.’”
There is more work to be done at a eurozone level, he says. “As long as fiscal policies are different in different countries, there will be imbalances and disharmonies between fiscal and monetary policies.”
But in the meantime, the likes of the UK, Germany and France are attractive investment markets, he says. “They have been less impacted by the crisis. These economies will push forward the whole region.”
Wang says that by 2015 he wants to double the number of subsidiaries and branches CCB has around the world to 30. Last week he launched an operation in Luxembourg and plans to complement the group’s existing subsidiary in London with a branch that can leverage the strength of the Chinese balance sheet.
Planned lending increases in the international business – both to corporate customers and governments – should boost foreign assets by 35 per cent a year from their current Rmb542bn, lifting the proportion of the overall balance sheet accounted for by international business from 4 to 7 per cent.
China’s banks have good reason to step up their forays abroad. Aside from fulfilling long-held ambitions to be taken more seriously on the global stage, and capitalising on favourable valuations relative to western rivals, there is a growing realisation that they need to follow their customers.
“There is frustration among some Chinese corporates that they can’t rely on Chinese banks to back them in their own international expansion,” says one investment banker who knows the market well.
Europe is one area where Chinese banks have been very cautious, despite the fact that the European Union is China’s largest trade partner. ICBC, the most aggressive of Chinese banks to date, has bought banks in South America, North America and Southeast Asia, but has so far confined itself to opening a handful of branches in Europe.
The potential for a bold move abroad by CCB contrasts with the less edifying state of Chinese banks at home.
Loans categorised as non-performing remain low, at less than 1 per cent of the banking sector’s assets, but overdue loans were up almost 30 per cent in the first half and the economy’s continued slowdown is expected to add to the pressure.
Wang says CCB’s non-performing loan ratio – down from 1.09 per cent to 1 per cent in the six months to June – is falling because of tighter controls. “We have an early warning system for export-focused businesses,” he says. “We have cut our exposure to high-risk industries, such as companies that are reliant on government work, those with overcapacity and property developers.”
In addition, he says, loans are being repriced, and plans for securitisations will also help shed assets, both healthy and non-performing.
But the pressures are mounting, too. The government has started to allow greater deregulation of deposit rates, hitting the cushy guaranteed interest margins that have traditionally driven more than two-thirds of bank profits.
And with many banks also in need of more capital to meet the incoming global Basel III standards, investors have cooled on the sector. CCB’s Hong Kong-listed shares have dropped 10 per cent over the past year.
But some analysts believe that Chinese bank shares are now undervalued. CCB had nearly 15 per cent profit growth in the first half and it is also the best capitalised of the country’s biggest banks, with a tier one capital adequacy ratio of 11.2 per cent. -By Patrick Jenkins