A US regulator’s decision to approve for the first time a Chinese bank’s takeover of a US bank marks a vote of confidence in China Inc and a turning point in the US-China relationship.
Lawyers on the deal expect similar acquisitions to follow, but note the limits of what the approval signals.
The Federal Reserve approval was granted last week to The Industrial and Commercial Bank of China (ICBC) in its acquisition of an 80% stake in the US subsidiary of Bank of East Asia (BEA).
The landmark deal opens the door for Chinese banks to enter the US market through acquisitions or establishing branches. But while the implications of the deal should be recognised, they should not be exaggerated according to H Rodgin Cohen, the Sullivan & Cromwell partner that led advice to the seller.
Cohen said this was the ideal, or most likely, first Chinese deal to receive Federal Reserve approval because of the target’s client-base with the indigenous Chinese population and it specialising in Sino-US trade. The target being a small bank engaged in a relatively traditional set of commercial banking activities also helped.
“I think the Federal Reserve would probably have serious issues if a Chinese bank tried to acquire a large US bank,” said Cohen. “In the ICBC/BEA order they note the financial stability factor and suggest that they would look with much more skepticism at large acquisitions.”
The key to the deal’s approval was the Federal Reserve’s first-time decision that the foreign bank is subject to comprehensive and consolidated supervision (CCS) by its home country regulator – in this instance, the China Banking Regulatory Commission (CBRC).
CCS approval is on an institution-by-institution basis, but unless future Chinese acquirers are subject to special supervisory circumstances, it is logical that the regulatory system will be the same and CCS approval will follow.
White & Case partner Ernie Patrikis who acted for ICBS said a signal had been sent that the US banking market was continuing to open up for branching and acquisitions and other equity investments by mainland Chinese banks in particular and international banks in general.
While the majority of developed financial jurisdictions have received CCS approval, China’s approval is the first to gain the attention of the worldwide banking community.
Cohen said that India is probably the only other country of significance yet to receive CCS approval, and that this should come soon.
Lessons for the future
During the ICBC/Federal Reserve discussions leading up to the filing in April 2011, three factors received special attention by the regulator: CCS in China, the acquirer’s risk management process, and the bank’s implementation of government policies on anti-money laundering and anti-terrorist financing.
In its application the bank shared with the Fed the business plan for its 2010 acquisition of the Bank of East Asia’s Canadian unit. According to Patrikis, this demonstrated ICBC’s step-by-step approach to penetrating new markets and integrating operations.
This was cited in the Fed’s order and appeared to provide some comfort.
US-China vote of confidence
The Fed’s consent to the ICBC/BEA deal came 13 months after it was filed and 10 months after CBRC approved the transaction.
“That’s a long time,” said Patrikis. “In my view it could have been approved somewhat more promptly.”
The ICBC approval coincided with Fed approval for Bank of China and Agricultural Bank of China to open US branches. And followed the meeting this month of the fourth US China Strategic and Economic Dialogue, in which the US and China parties met in Beijing to discuss measures to open trade between the two countries.
White & Case partner Francis Zou, who represented ICBC and Bank of China said the move reflected US confidence in CBRC’s ability to oversee China’s banking sector.
“After a lengthy - but expected - wait in which the Federal Reserve consulted with the CBRC, and analysed additional sources including information supplied by the deal-makers as well as the International Monetary Fund’s (IMF) study on China’s financial sector, the regulator determined that the CBRC had made significant progress in its ability to regulate Chinese banks,” said Zou.
“Their decision should foster greater integration between the US and China and deepen exchanges between the two countries’ financial sectors, in particular,” he said.
Zou said there were currently far more US bank subsidiaries in China than there are China counterparts in the US. “This deal enables ICBC to address some of the imbalances in this area,” he said.
Those Chinese banks already in the US have been well received, thanks in part to their ability to provide credit to Chinaco’s US subsidiaries, medium sized US borrowers and multinational corporations during the global financial crisis.
“They are perceived in a very different light to those relatively small-scale China Listcos that have the subject of recent accounting irregularity scandals,” said Zou.
“It’s natural that there will be other similar acquisitions or more US branches of China banks established in the future,” he said.
Boss & Young’s Shanghai-based partner Hubert Tse agreed. “China’s largest banks already have a US presence so I expect we will begin to see the next tier of smaller banks following their lead by opening offices there or by instigating similar deals as this,” he said.
“This is something Chinese authorities requested domestic banks be allowed to do at the recent Strategic and Economic Dialogue in Beijing,” he added.
Nonetheless, he believed it would be some time before any Chinese takeovers of US banks without a China nexus. “At the end of the day, this is a change in ownership of a US subsidiary of a foreign bank,” he said. “It will be a while before we see similar deals involving a US entity.”
Zou warned that it was important for any banks considering the move to have a clearly thought out growth plan for the US market. “There are a lot of well-established international banks doing very well in the US,” he said.
“In this environment, foreign banks must grow prudently,” Zou added. “If their growth plan involves an acquisition, it helps to meet with the US regulator in the early stage of the transaction to get their feedback and to ascertain whether or not that kind of transaction is likely to win regulatory approval.”
Emphasising internal controls and risk management process was also critical, he said. “Maintaining a good track record in the market is of utmost importance,” he said.