Western Banks Show Little Attempt at Relationship Building in China

Once upon a time, American and European banks promised fledgling Chinese ones that as long as they could maintain growth in their rising white-hot economy, cash would never be a problem. Now Chinese banking executives must be wondering why they ever listened to that utopian yarn in the first place.

As the credit crisis has consumed the cashflow of financial institutions throughout the U.S. and Europe, Western banks haven’t just reneged on their former promises, but in many cases they have violated the very spirit of them. Chinese banks weren’t looking for short speculative cash to prop up their share prices (there’s plenty of that to be found in Shanghai): they were looking for committed shareholders in the west with who they could build long-term business synergies.

On Tuesday morning in Asia, Industrial & Commercial Bank of China announced in a pair of joint statements that American Express had divested its stake of 638 million shares in the Chinese bank, while Allianz sold 3.2 billion shares. Both share sales were completed in private transactions, with Amex’s stake going to a single buyer and Allianz’s split between a groups of investors. Both stock sales represented a discount to market price of four percent. Apart from the fact that the sale took place at the discount – and hence jeopardized the market value of ICBC at a precarious time — it’s destabilizing for any bank to experience shareholder changeovers of this magnitude. It’s certainly not in keeping with a long-term focus.

ICBC is not in unfamiliar territory. A little over a month ago, Goldman Sachs struck a deal with the bank to sell part of its 4.9 percent stake, then valued at around $7.6 billion. “This arrangement gives us the flexibility to reduce the size of our investment, when we choose to do so,” said a Goldman spokesman then.

Prior to that, Fortis sold its 8.23 percent stake in ICBC back to the bank’s parent for around €170 million ($145 million).

Embarrassingly, two of the share sales came directly after ICBC lived up to its side of the bargain. The Goldman Sachs share sale was completed after ICBC reported that it saw a 36 percent rise in 2008 net income, while the share sales today by Amex and Allianz directly follow a 6.1 percent rise in the bank’s first quarter profit. In the January to March period this year, ICBC made 35.15 billion yuan ($5.15 billion) vs. 33.1 billion yuan ($4.85 billion) in 2008, ICBC said Monday.

Bank of China finds itself in a similar situation. Although the bank announced a 58 percent drop in fourth quarter earnings in March, it remained loyal to shareholders, increasing its dividend payout to 51 percent vs. 45 percent previously. Such loyalty was remarkable given that Royal Bank of Scotland sold its entire stake in Bank of China for $2.34 billion only two months earlier. “The decision to sell the stake forms part of the ongoing strategic review of the group’s businesses announced in October,” RBS said in a statement at the time.

It’s understandable that the western banks have little option but to realize some of their Chinese investments. But divesting their entire stakes while making self-serving statements about doing so won’t win them much favor if they decide in the future that they wish to take advantage of the country’s boom in consumer banking by re-investing. Chinese bankers may be conciliatory negotiators for now, but that’s not to say they’ll welcome such investors back with open arms if they continue in this vein.