Monday, January 24, 2011

ICBC - Industrial and Commercial Bank of China

Recently, ICBC (Industrial and Commercial Bank of China) has been in the news due to their expansion mode. I have taken some snippets of it:

ICBC to double Europe Presence
(source: WSJ online):
http://online.wsj.com/article/SB10001424052748703551604576085682740756822.html

(a) ICBC will open branches in Paris, Brussels, Amsterdam and Milan this week, and Madrid the week after, a spokesman for the bank said in response to questions from The Wall Street Journal

(b) The bank already has a presence in London, Moscow, Luxembourg and Frankfurt. The spokesman said the new branches will offer retail and commercial-banking services.

(c) The banks' expansion is starting to pick up pace, with ICBC entering Vietnam, Malaysia, Thailand and Canada last year

(d) In recent years, it has taken over small retail banks in Indonesia and Thailand, re branding both with ICBC's name. That has given it a network of fewer than 20 branches in each country, adding to the small network it set up on its own in about 10 other countries across Asia and the Middle East. In addition, it took over Bank of East Asia Ltd.'s collection of about six branches in Canada last year

(e) In Europe, however, ICBC has lagged behind smaller Chinese rival Bank of China Ltd., which has traditionally been regarded as the most international of China's banks. Bank of China has branches in 11 cities around Europe, including Moscow. Both are far behind major global banks: Citigroup Inc., for example, has thousands of bank branches outside of the U.S. under its own brand and those of local subsidiaries

My personal thoughts:

Pros - investing together with the growth of ICBC bank internationally



1. It's interesting to know that ICBC is fast expanding globally across the globe, despite other banks in Europe facing debt problems, stiff overseas regulations towards Chinese banks and the need for Chinese banks to conform to a certain level of standard. Perhaps we could see a strong presence of the ICBC brand in the near future should the growth continues? If this happens, the bank business value increases over time - a.k.a. Citigroup or HSBC prototype, making the their banking units highly sought after, not just by the Chinese population but other country nationalities. By the end consumer, the intermediaries and the institutions

And that's what, we as retail investors, hope to visualize should we feel bullish about ICBC in the long term. We just hope the external factors are encouraging, considering the conservative domestic regulatory regime wary of the local banks moving too fast

2. With the trend that the mid-class Chinese are spending huge (high disposable income) on luxury goods overseas and their familiarity with local banks, there is a need to have local bank branches to serve them globally. This includes ATM (Automated Teller Machines) to obtain ready cash. ICBC located in Milan, one of the fashion capital in the world, provides an accessible banking platform for the Chinese to spend on high end retail goods. Their expansion to Milan could be strategic to meet Chinese-based consumers' banking requirements and hence, good visionary abilities to maximize the opportunities

3. Let's not forget the needs of the high net worth Chinese individuals whom are willing to spend and invest overseas. ICBC is able to step up their private banking services around the world to cater to this segment due to the branch expansion and joint collaboration.

4. M&A activities - ICBC has agreed to buy a majority stake in the Bank of East Asia, US unit, making it the first Chinese lender to buy into a US retail bank. Will we see more acquisitions to gain access to the country banking sector?

5. ICBC, the world's largest bank by market value YTD, aims to project her sights further - ICBC set for global advance and achieved breakthrough in escalating its international presence in 2009. That included the purchase of 70 percent shares of Bank of East Asia Canadian unit, the voluntary tender offer for all shares in Thailand ACL Bank, the merge of Seng Heng Bank and Macau Branch to form ICBC Macau, the opening of Hanoi Branch and the business license received for Abu Dhabi Branch and the subsidiary bank in Malaysia.

On the contrary, ICBC assumes potential risks and challenges:

1. Risk of over-expansion. Like a domino effect, one falls, the other falls flat
2. LTV (loan to valuation) risk and the risk of not setting strict policies in lending
3. Overseas regulatory bodies wary of Chinese banks setting branches in their home country
4. Proper standardization and internal banking control and procedures - robust enough?
5. The need to cater various consumer profiles (consumer banking) internationally
6. Volatility due to government control, interest rate hikes and other related factors
7. The chance of bad debts and multiple loan accumulation without proper validation & financial checks; for instance the risk of higher NPL (non-performing loans)
8. The risk of an "asset bubble" with China, being the 2nd largest economy after USA, driven by the stimulus package to drive export demand & foriegn investment
9. Under appreciation of the Reminbi against the US Greenback affect the dollar value
10. Well-defined management structure in their overseas subsidiaries - reporting channels?

Looking at the snapshot above, I will remain confident about ICBC prospects silently, as one of the world most valuable bank, a bank the Chinese could proudly call it their bank amongst the top 4 state-owned Chinese banks. Imagine finding ICBC branches, ATMs in most major cities worldwide and anyone is able to transact their bills and fees seamlessly. A one-stop shop for banking and investment needs.

2 years back, I was in Shanghai for a trip and popped by the ICBC branches to observe their banking activities. And I thought it had potential to grow internationally. When I returned back to Singapore, I bought up ICBC shares (1398.hk) for short term gains. Took some profits twice. Have divested the funds to yield-based stocks to grow my passive income.

This time, I may be keen to re-enter into ICBC for the longer term as I was a bit surprised by their rate of growth, especially the foray into Europe (i.e. Milan, Madrid, Paris etc.) It leads me to re-think my previous agenda for buying up ICBC and remain positive about their future direction to be a "global bank" while able to stomach the volatility and risks involved.

Not vested but may consider strongly very soon. Watch out the space in my portfolio!

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