ICBC Boosts BEA Ties; Buyout Ahead? 工商银行促进与东亚银行关系：未来完全收购？

By newsdoug on May 11, 2012

BEA gets cozy with ICBC Chinese lenders are in the headlines today with news that the US has given the green light for 3 of China’s top 4 banks to establish a presence in the world’s largest banking market, including approval for ICBC’s (HKEx: 1398) $140 million purchase of 80 percent of the US unit of Hong Kong’s Bank of East Asia (HKEx: 23). (English article) But while many are looking at the bigger picture, applauding this long-awaited opening of the US to Chinese banks, I’m more interested in the growing relationship between ICBC, China’s largest bank, and Bank of East Asia (BEA), one of Hong Kong’s largest and oldest family owned banks. ICBC’s relationship with BEA dates back at least 3 years, with the 2009 announcement that ICBC would purchase a similar 70 percent of BEA’s Canadian unit for about $80 million. The finalization of this latest agreement to purchase a majority of BEA’s US unit would make ICBC the controlling owner of BEA’s former North American business, with BEA remaining as a junior partner with minority stakes in both the US and Canada. This approach looks similar to what ICBC has done in Africa and Latin America, where it has forged a similar relationship with Standard Bank (Johannesburg: SBKJ) by first buying a 20 percent stake in the South African lender in 2007, and then last year purchasing a majority of Standard Bank’s Argentine unit. (previous post) I personally like this approach, as it has allowed ICBC to enter new markets in Africa, South America and now North America by buying existing assets from banks that have already established a presence in those markets. In both cases, ICBC has also wisely chosen to keep its foreign partner in the equation after its purchases by allowing Standard Bank and BEA to both remain as minority shareholders. This strategy allows ICBC to draw on its partners’ expertise in those markets, while also allowing ICBC to use its own huge resources to expand these new units. The big difference between BEA and Standard Bank is in their size. While Standard Bank was valued at about $28 billion at the time of ICBC’s stake purchase in 2007, BEA is much smaller, with a market capitalization of about $8 billion. That difference leads me to wonder if this new romance between ICBC and BEA could eventually lead to an outright marriage between the pair in the next 2 years, which strategically looks like a very nice fit. In fact, BEA has been frequently named as a takeover target due to its size and strategic location, with a base in Hong Kong and strong ties to China and North America. Those ties could look especially attractive to ICBC, which only has a limited presence in Hong Kong and is now using BEA’s North American ties to enter the US and Canada. It’s probably still too early to say if this budding romance will really end in a marriage, but if these recent partnerships in the US and Canada work out well, I would put the chances for such a tie-up in the next few years at more than 50 percent.

Bottom line: ICBC’s latest tie-up with Bank of East Asia in the US is part of a smart overseas investment strategy that could end up in a marriage between the 2 banks.

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