ICBC-Standard Chartered: Industrial and Commercial Bank of China is already the world’s biggest bank – but it could be bigger and broader still. The time may have come to pursue a longstanding idea of a deal for emerging-markets lender Standard Chartered. While the combination was often rumoured before the financial crisis, in a more stable world it makes more sense than ever.
ICBC has a clear mandate from its state controllers to go shopping overseas. It is already buying Thailand’s ACL Bank and holds a 20 per cent stake in Africa’s Standard Bank. Buying StanChart would fit its strategy well. StanChart’s assets are mostly in resource-rich regions like South-East Asia and Africa, where ICBC still has little infrastructure. Take India. It has $40 billion of annual trade with China and some of the world’s highest lending margins. StanChart has more branches than any other foreign bank.
StanChart would not much alter ICBC’s loan to deposit profile. The combined bank’s lending would be 61 per cent of deposits, compared to 58 per cent at ICBC now. But ICBC could use the skills that StanChart’s bankers and traders would bring. The London-headquartered lender’s trading revenues dwarfed ICBC’s in the first half of the year – a perk of being perched in so many different currency markets. ICBC could diversify its earnings away from the whims of China’s economic policy.
Now could even be a good time for ICBC to vault the Great Wall. ICBC has so far been able to offset the impact of a low-rate environment on margins by simply piling on more loans. If China reins in lending next year but keeps rates low, that trick won’t work any more.
These financial and strategic benefits could arguably justify a ICBC paying a 30 per cent premium to StanChart’s current share price, valuing the bank at $63 billion, in spite of its already rich valuation. The bank trades at 2.9 times estimated book value for 2009, based on Thursday's closing price – a level beaten by only a few rivals, ICBC among them. Indeed, a deal would barely dent ICBC’s capital ratios.
A deaI would have complexities, for sure – such as convincing StanChart’s main regulator, the UK’s Financial Services Authority, that the bank's financial health would remain intact. ICBC would also have to persuade Temasek, the Singaporean sovereign wealth fund, to sell its 19 per cent stake. But Temasek will need an exit one day – and at a decent premium, it is hard to see one that is better.