SPD Bank Leads Shanghai Financial Consolidation

By newsdoug on March 20, 2014

SPD Bank to buy Shanghai Trust

I don’t follow China’s domestic banks too closely, largely because all are controlled by the government and their actions are more often directed by policy initiatives than real commercial factors. But the latest moves surrounding SPD Bank (Shanghai: 60000), also known as Pudong Development Bank, indicate that this relatively young financial firm could be a player to watch as China moves ahead with a major overhaul of its stodgy financial sector. Just last week SPD made minor headlines with its purchase of a small asset manager, and now it’s back in the headlines with word that it will merge with Shanghai Trust, one of the city’s largest trust companies.

I have no illusions that any of this latest activity is driven by market factors, and understand that the city government is the main player behind these latest moves. Such mergers are consistent with the latest signals from Beijing, which is also allowing private investment into the banking sector in a bid to make it more competitive and efficient. (previous post) Still, it’s worth pointing out that Shanghai is often chosen as the testing ground for major financial reforms, as reflected by the city’s selection last year to host the country’s newest Free Trade Zone.

Accordingly, these latest signals make SPD look like a company to watch, as traditional state-owned lenders get more space from their government masters to try to behave more commercially. Despite SPD’s state-owned status, the company is actually a relative newcomer to the nation’s lending scene, founded just 22 years ago as a joint stock bank. Thus it lacks much of the baggage that comes with many older state-run lenders, which often are burdened with unproductive ties to local state-run enterprises and obligations to fund local officials’ favorite projects.

SPD’s Shanghai-listed shares were suspended last week when rumors first emerged that it would acquire Shanghai Trust as part of the city’s plan to consolidate the local financial services sector. (English article; Chinese article) Now the bank has officially confirmed the plan, though details are still being worked out. (company announcement) In this case the details really don’t matter too much, since both entities are controlled by the local government and SPD will inevitably get very good terms for its takeover of Shanghai Trust.

Somewhat surprisingly, SPD shares only rose slightly after trading resumed following a brief suspension. That’s probably less a reflection of any problems with SPD and more a reflection of the broader doldrums in China’s stock market, which has been sluggish these last few years due to the nation’s slowing economy. But if I were a Chinese investor, I would take a closer look at this bank as a potential new leader in Beijing’s ongoing overhaul of its banking sector.

SPD already counted Citigroup (NYSE: C) as one of its earliest strategic investors, though the pair formally ended their equity tie-up in 2012 when Citi sold its remaining 2.7 percent of the Chinese lender. But the pair said at the time they would continue to work together on a number of strategic initiatives, including tie-ups as part of SPD’s plans to go global. Before this latest Shanghai Trust announcement, SPD also announced a week ago that it would take over an asset management company in a relatively small deal valued at just HK$8.5 million, or about $1 million (company announcement)

SPD also has a 2-year-old joint venture with Silicon Valley Bank, seeking to tap the US lender’s expertise at funding technology start-ups. My sources told me more than a year ago that joint venture was struggling due to its inability to conduct business in China’s local currency, the yuan, due to restrictions under Chinese rules for new banks. But that prohibition should be ending soon, meaning the joint venture bank could finally be able to provide yuan loans to the many Shanghai tech start-ups that desperately need new funding.

All these signals bring me back to my original point, namely that SPD could become a lender to watch, as it has clearly been chosen as a consolidator for financial service companies owned by the Shanghai city government. Its strong connections in China’s financial capital, combined with its overseas ties with Citi and Silicon Valley Bank, seem to position the company for strong future growth both domestically and also abroad.

Bottom line: SPD Bank’s purchase of Shanghai Trust indicate the bank will become a consolidator of financial service companies in Shanghai, positioning it as a potential major new as China overhauls the sector.