Bank's future rests on bad debt disposal
Updated: 2006-07-11 07:21
(HK Edition)
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The battle for a stake in the mainland's struggling Guangdong Development Bank may hinge on who takes responsibility for more than US$6 billion of bad assets, industry sources said.
Citigroup Inc and France's Societe Generale (SocGen) have been jostling for a stake in Guangdong Development Bank for nearly a year with no resolution yet.
Now, new figures showing Guangdong Bank had about 50 billion yuan (US$6.26 billion) in bad debt at the end of 2005 may further delay proceedings.
The winning bidder for Guangdong Development Bank would be expected to take nearly half of its bad assets, while local government and the central bank are wrangling over how the remainder would be divided. That issue must be resolved before any foreign investment occurs, the industry sources said.
The Guangdong bank's non-performing loan ratio reached about 25 per cent at the end of 2005, compared with a nationwide average of about 8 per cent, said a source, citing information from the bank's external auditing report by KPMG.
"Those numbers are much higher than market expectations, though both Citigroup and Societe Generale would agree to take 15-20 billion yuan (US$1.87-2.5 billion) of the bad assets if either of them won the bidding," the source said.
Another banking source close to the situation, who confirmed the figures, told Reuters that the remaining 20-30 billion yuan (US$2.5-3.75 billion) of bad assets would be shared by the local Guangdong government, the de facto controller of the bank, and Central Huijin, the investment arm of China's central bank.
A KPMG spokeswoman in Hong Kong was not available for immediate comment.
Citigroup's US$3-billion bid in December 2005 trumped rival groups led by French bank Societe Generale (SocGen) and Ping An Insurance (Group) Co, the mainland's number-two life insurer.
But Beijing subsequently asked Citigroup and SocGen to resubmit their bids after it decided not to let Citigroup alone proceed with an offer for a 40 per cent stake because that would exceed a 20 per cent limit allowed for a single overseas investor.
The bank, based in the wealthy southern province of Guangdong, was founded in 1988 and Beijing prodded it to take over smaller businesses, including rural cooperative unions and a local trust investment firm in the late 1990s.
Those deals did little to boost profits and instead sent the bank's bad assets to record levels, the sources said.
"The local trust firm that Guangdong Development Bank took over in 1996 created about 2 billion yuan (US$250 million) in bad assets alone, and other small cooperative unions brought the bank billions of yuan of new bad loans in that period," said the second source.
"Now it becomes a question for the central bank and local government: who should be responsible for which part of the legacy?" said the source.
Central Huijin was likely to take less than 8-12 billion yuan (US$1-1.5 billion) of bad assets, the two sources said.
That would also mean the Guangdong government would have to shoulder 12-18 billion yuan (US$1.5-2.25 billion), and negotiations over that amount are now a major hurdle to any foreign investment deal, they said.
"They have to solve their own internal issues first, then they will focus on reviewing foreign applications," said the first source. "It will take longer than everyone's expectations."
(HK Edition 07/11/2006 page3)