Chinese financials branch out – IFR Asia

IFR Asia, July 2009

When TPG’s Newbridge Capital arm agreed to sell its stake in Shenzhen Development Bank to insurer Ping An, international commentary focused on the successful exit by a western private equity firm from a Chinese business. But there was another, less remarked trend in evidence too: the growing interest in the universal banking model in China.

Ping An is one of the clearest examples of this approach. Even before the SDB deal, Ping An had been working to build itself out from being a leading life and P&C insurer to a multi-faceted financial services group. In January 2009 its Shenzhen Ping An Bank arm was given approval to be renamed Ping An Bank, reflecting its integration into the rest of the group. It has fast growth in loan, intermediary and retail banking businesses, and has a network of wealth management centres under the Anchor brand, targeting Shenzhen’s high net worth consumers (of whom there are many). It issued 1.5 million credit cards in 2008, its first year of issuance.

Alongside that there is an asset management business, with RMB452 billion under management as of December 31; Ping An Securities, containing investment banking, brokerage and proprietary trading businesses; and Ping An Trust, one of the first trust companies to be approved by the People’s Bank of China.

Ping An takes this approach because it believes in the power of synergies: half the new cardholders in 2008 were already Ping An customers, and 14.3% of the premium income for property and casualty insurance in 2008 came from cross-selling, along with 14.9% of new assets under its pension annuity investment management business.

Now with the SDB stake, Ping An is the clearest example of this multi-pillar approach to financial services in China, but it’s not alone. The Citic group, for example, contains arguably the country’s leading brokerage (Citic Securities) as well as a powerful bank within its group, although they are separate listed entities. China Construction Bank is in talks to acquire China Cinda Asset Management – not a surprise, since Cinda was originally set up as a vehicle to deal with CCB’s bad loans, but representative of the same trend.

So will China move further and further towards universal banking? Probably – but slowly, analysts say. “I think there will be progressive development of the universal model, but I don’t think the trend will be very fast,” says Victor Wang, a China banks analyst at UBS. He notes that there is a distortion between the relative sizes of banks, brokers and insurers: ICBC has about RMB10 trillion in total assets, which is more than double the RMB4 trillion total assets of the entire insurance industry, which in turn is far bigger than the total brokerage industry. “Right now commercial banks are dominating the financial industry in terms of their distribution network, their assets and their staff,” he says. “I don’t think it would be the best idea for regulators to allow the universal business model all of a sudden with banks doing insurance and brokerage. It would result in massive reshaping of businesses in a short period of time.”

What, then, to make of the Ping An/SDB deal? “I think the regulators will allow deals on a case by case basis. They will allow specific names to buy into relatively smaller players,” Wang says.”But I don’t think in the next two years we are going to have a major merger of big players in different business areas.”

On top of that, China is not ignorant of what’s happening elsewhere in the world, and the universal banking model has taken a severe knock in Europe and the US. Chinese institutions have in some cases been badly hit by investments in these groups, most obviously the write-downs Ping An itself had to take on its investment in Fortis, which almost wiped out its entire 2008 financial year profit. “People are now a lot more cautious domestically about the universal model,” says Wang. In particular, the appetite for acquisitions overseas appears to have dimmed, and even if it does appeal to Chinese institutions, it will be tougher now to get such a deal past the regulators.

Nevertheless, small deals are likely to continue to happen. Do they make sense? Macquarie’s Mark Kellock notes: “While firm servicing agreements have yet to be signed, we expect Ping An to achieve synergy benefits by cross-selling both life insurance and P&C product into SDB’s vast customer base.” SDB operates 129 branches in 14 cities not occupied by Ping An; also it should be able to cross-sell its bank product into Ping An’s 45 million-strong customer base.

On the CCB/China Cinda deal, if it happens, one analyst notes: “They have a lot of cooperation anyway and if CCB can get control it’s a great business. But even if it acquires, I don’t think all its [CCB’s] outlets will then be allowed to do brokerage business.” In other words, acquiring a business with a securities licence won’t automatically allow all the branches of the acquiring bank to do all the things the target was doing.

Others feel that Ping An and Citic in particular will be watched closely by the regulators as test cases. Consistent good performance by those groups over time should lead to a more relaxed attitude to further consolidation and universal financial services.