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HSBC taking $1bn China bank stake


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HSBC is the world's second-largest bank by market value.
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BEIJING, China (Reuters) -- China's fifth-biggest lender has agreed to sell up to a fifth of its shares to HSBC, a bank regulator said Thursday, expanding the global bank's footprint in a market holding $1.3 trillion in savings.

The sale by Shanghai-based Bank of Communications of such a stake, seen to be worth around $1 billion, would be the largest by a local bank to an overseas investor.

It comes as Beijing overhauls a sector bogged down with more than $200 billion in bad debt -- the weak link in the world's sixth-largest economy.

Bank of Communications had said in May it was courting firms such as HSBC -- one of the more aggressive players in a restrictive arena due to open to foreign banks in 2007.

HSBC, the world's second-largest bank by market value, now owns slices of Bank of Shanghai and Ping An Insurance, China's second-largest life insurer, which debuted on the Hong Kong Stock Exchange on Thursday after a $1.84 billion international public offer.

Analysts had estimated a Comms Bank sale could be worth about $1 billion. One industry analyst said the bank could command a much higher premium than its rivals.

Its loan book -- dominated by loans to major industrial firms such as Asia's top oil refiner Sinopec Corp -- looked better than the Big Four's, they said.

"Bank of Communications can strike a deal to sell its shares at twice their par value, around two yuan per share, simply because it has better assets than many Chinese peers," said Qin Yuexin, a senior banking analyst at China Southern Securities.

"Communications Bank has much better intangible assets, such as a solid reputation at home and abroad."

HSBC's shares are down nearly six percent this year, underperforming the market's 3.5 percent slide. They were up 1.3 percent on Thursday, lagging the market's 2.2 percent gain.

A Comms Bank deal would mark a reform milestone.

"Both sides have basically reached an agreement on this," said Li Fuan, deputy head of the policy and regulation department at the China Banking Regulatory Commission (CBRC).

"The maximum stake (that) can be sold is 20 percent," he told Reuters, adding the sale would need final approval from regulators. "The price is something they will negotiate."

HSBC Holdings Plc and Comms Bank declined comment.

Full competition

Beijing is pushing banks, saddled by non-performing debt after decades of politically driven lending, to revamp balance sheets ahead of full overseas competition.

It started the process by injecting $45 billion into the Bank of China and Construction Bank -- two of the so-called Big Four -- in late 2003, to prepare for share floats by 2005.

Banks have also been encouraged to seek foreign investors and bring in foreign expertise to introduce more modern methods of risk assessment and credit controls.

Global lenders are keen to buy into China's $1.3 trillion personal savings market, and are eyeing local banks' nationwide networks and local savvy.

Standard Chartered wants to agree to buy a stake by the end of 2004, while Singapore's DBS Group Holding Ltd is in talks with five Chinese banks.

But overseas players have been hamstrung by restrictive regulations, from high capital requirements per branch to barriers around many yuan-denominated services.

Any 20 percent stake buyer would automatically become Comms Bank's second-largest shareholder. But analysts said that might not translate into a proportionate say in the daily affairs of the lender, which would remain government-controlled.

"What kind of control do they get? That's going to be one very crucial aspect of an eventual deal signing," said Sunil Garg, a Hong Kong-based analyst with Fox-Pitt, Kelton.

Bank of Communications -- founded in 1908 at the start of Shanghai's economic heyday -- plans to slash bad loans and beef up capital this year before an eventual listing, according to private documents obtained by Reuters.

The lender, whose top shareholder is the Ministry of Finance, aimed to finish a revamp by June 30, according to documents handed out at a shareholders' meeting obtained by Reuters.

Comms Bank hopes to raise its capital adequacy ratio to more than 10 percent from 7.41 percent as of end-2003, and cut its bad loan ratio to less than five percent from 13.31 percent at the end of last year, the documents said.

That compares with bad loan ratios of nearly 20 percent for the Big Four, which also include Agricultural Bank of China and the Industrial and Commercial Bank of China.


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