BEIJING, Oct. 12 -- BNP Paribas, France's second largest bank, is expected to get a 19.7 per cent stake of Nanjing City Commercial Bank, a move that will accelerate its expansion in the Chinese market.

    "The two parties are scheduled to sign the investment agreement today," Hu Bin, the office head of Nanjing City Commercial Bank (NCCB), told China Daily. "The participation of a foreign leading lender will help to improve NCCB's corporate governance and risk management, thus paving the way for the looming list of A-shares."

    According to China Business News, BNP Paribas is likely to get a 19.7 per cent stake at the cost of some 3 yuan (37 US cents) per share, and the total investment will be around 700 million yuan (US$86.4 million).

    Insiders said that 15 per cent of the stake has been transferred from the International Finance Corporation (IFC) which obtained the shares as early as 2001.

    "As IFC's investment is not for commercial purposes, there is minimal business co-operation between us," the insider told China Daily, but he declined to be named.

    Lin Zhongxian, vice-president of the Beijing branch of BNP Paribas, told China Daily that they would join hands in seven sectors including the retail business, consumer loans and capital markets. "But each sector will receive equal attention," Lin stressed.

    In an interview with China Daily in June, Jean-Francois Di Meglio, head of corporate and investment banking for Asia and the Middle East, confirmed that the bank might look at taking a smaller hold of about a 15-20 per cent stake in China's second-tier city and commercial banks, which would mean an investment of around US$50-100 million.

    "We are talking with a few commercial banks throughout the nation, as we want to know more about the retail banking market in China."

    The Paris-based bank would finance any purchase by tapping part of the 2 billion euros (US$2.5 billion) a year it has set aside for purchases.

    
Meglio said his bank currently has no interest in buying into any of the Big Four State-owned commercial banks, noting their huge size would make it difficult for BNP Paribas to have the final say in management.

    Although the bank wants management powers, the official said he is not expecting this from the planned equity purchase, citing the 20 per cent ceiling on a single foreign bank's investment in a Chinese bank.

    But partnering with a smaller firm increases the possibility of management control. BNP Paribas is in charge of management of Changjiang BNP Paribas Peregrine Securities Co Ltd, a joint venture with Changjiang Securities, a relatively small local brokerage, although it has only a 33 per cent stake in it.

    BNP Paribas reportedly has visited Suzhou City Commercial Bank and Ningbo City Commercial Bank, located in East China's Jiangsu and Zhejiang provinces respectively. But their negotiations have not been as smooth as expected.

    BNP Paribas currently has four branches and two representative offices in China, and owns one fully-owned subsidiary BNP Paribas (China) Limited, and two joint ventures Changjiang BNP Paribas Peregrine Securities and SYWG BNP Paribas Asset Management Co Ltd.

    As they accelerate forward into the Chinese market, foreign banks are increasingly looking at smaller local lenders as possible merger and acquisition targets.

    On the other hand, Chinese city commercial banks are also stepping up their efforts to bring in foreign strategic investors as the China Banking Regulatory Commission (CBRC), the banking watchdog, has asked them to increase their capital adequacy ratio to 8 per cent by the end of 2006.

    With less than a year and a half before the CBRC deadline, many of China's 113 city commercial banks may be unable to reach this target and about 30 may be closed, according to Jonathan Anderson, head of UBS' Asia-Pacific Economics.

    To survive, some city commercial banks have teamed up with strategic foreign investors. They include banks in Beijing, Nanjing, Ji'nan, Hangzhou, Xi'an and Nanchong.

    NCCB is one of the leading city commercial banks in the country. Its 2004 annual report suggests that total assets topped 39.1 billion yuan (US$4.83 billion) at the end of last year, with net profit hitting 215 million yuan (US$25.5 million) and non-performing loan rate dropping to 4.4 per cent. The lender's capital adequacy ratio was 9.14 per cent, higher than the industry watchdog's requirement.

    (Source: China Daily)