CCB-VTB bank deal strengthens Sino-Russian ties

Author: Ashley Lee | Published: 10 Jun 2013
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  • China Construction Bank’s $100 million stake in VTB Bank follows an agreement signed by Chinese president Xi Jinping during his high-profile visit to Russia;
  • The deal had to be structured around Russia’s capital markets and capital adequacy regulations;
  • Chinese banks’ high-profile acquisitions in the last year have included US targets. But they are expected to focus on emerging markets.

The partnership between China Construction Bank (CCB) and VTB, Russia’s second largest bank, signifies a tightening relationship between the two so-called BRICS.

Goldman Sachs’ Jim O’Neil created the acronym for Brazil, Russia, India, China and sometimes South Africa in 2001 on the grounds they were fast-growing countries at similar stages of economic development.

But since then, they have since forged closer ties, including by holding a summit every year since 2009. This partnership between the two powerful state-backed lenders signals China and Russia’s policy goals to bring their economies closer together.

"On both the political and business levels, there is quite a lot of interest in deals between China and Russia. This deal came off the back of a high-level visit in March from the Chinese premier to Russia," said Clifford Chance’s Terence Foo, who advised CCB on the bank deal.

The two countries have set a $100 billion bilateral trade target by 2015, and had already reached $88.2 billion last year. In an interview with Xinhua, Chinese president Xi Jinping said that the two countries would work together to reach the $100 billion target ahead of schedule.

CCB-VTB deal counsel had to work with Russian capital markets regulations to make the partnership work.

The deal

On April 26, VTB Bank announced its intention to raise up to RUB 102.5 billion ($3.18 billion) of new capital. Dual-listed in Moscow and London, the bank state it would raise this by issuing 2.5 trillion new through the Moscow Exchange.

The pre-emptive and secondary offerings diluted the Federal Agency for State Property Management’s stake from 75.5% to 60.9%.

A May 21 VTB press release noted that sovereign funds Norges Bank Investment Management, Qatar Holding and the State Oil Fund of Azerbaijan agreed to purchase more than 50% of the shares in the secondary offering. CCB invested$100 million.

Altogether, the four entities purchased approximately 55% new shares in VTB.

Pre-emptive offering

Foo said the agreements were structured in a manner specific to Russian regulations.

"We had a subscription agreement that was conditional upon the pre-emptive offering being completed first," he said. "Once that was closed, the parties would sign a separate offer and acceptance agreement that would then constitute the actual share purchase agreement."

The pre-emptive subscription period ran from May 6 to May 17. Once that ended, CCB was able to invest in the secondary offering.

Foo explained that this was structured to address a Russian requirement that prevents a listed company from making any offer until it has completed a pre-emptive offering to existing shareholders.

Capital adequacy

One of the reasons that the share sale was carried out was to boost VTB’s tier 1 capital ratio from 10.3% to 11.9%.

But Basel III requirements implemented by the Central Bank of Russia made it difficult for CCB to use special purpose vehicles (SPVs) to purchase shares.

As this represented an investment into a bank, the Central Bank of Russia required the investor to have adequate financial standing, including through sufficient net assets.

Foo said that if the investor uses an SPV to make the investment, that SPV would have had to show sufficient equity capital to cover the purchase price.

What to expect

One of the several agreements signed by President Xi during his visit to Moscow promoted a partnership between CCB and VTB. That preceded the banks’ deal, but signifies that the two financial institutions are planning to work closely together.

The full details have not been released, but IFLR understands that the agreement will promote mutually beneficial cooperation and a partnership in the investment and banking areas.

This deal shows that Chinese banks are following their Chinese corporate clients. In May, CCB opened a subsidiary in Dubai for its Chinese clients in the United Arab Emirates. China Daily reported that it is also looking to Taipei, San Francisco, Toronto and Luxembourg.

Chinese financial institutions have not, however, proceeded with M&A deals at the same pace as their corporate counterparts.

While ICBC acquired a controlling stake in Bank of East Asia’s US unit in 2012, most seem to be looking to emerging markets.

In 2007, ICBC purchased 20% of Africa’s Standard Bank, and this May it was reported that CCB would purchase the South American assets of German lender West LB AG.

Related links

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What ICBC’s approval means for China – US banking

Why bank sales will shape global M&A