Bank of Nova Scotia is looking to buy stakes in banks in China, Vietnam, the Philippines and Malaysia, after settling on what bank executives believe will be a winning strategy for expansion in Asia.
The bank said it will boost its interest in western China's Xi'an City Commercial Bank to 20 per cent - the maximum allowed under Chinese regulations - from less than 2.5 per cent, in a move that is emblematic of its nascent plan for growth in the region.
Despite the challenges that China's banking market poses for foreign banks, such as strong government restrictions on their activities, Scotiabank is keen to operate in the world's fastest-growing major economy because of the enormous potential it holds for financial institutions. Many simple consumer banking products that North Americans take for granted are relatively new to China, where the population has historically been averse to taking on debt.
So while many Western banks focus their efforts in China on investment banking and wealth management operations, Scotiabank's investment in Xi'an City is a play on growth in consumer lending.
Xi'an City Commercial Bank was created in 1997 through the consolidation of 42 urban credit co-operatives, and now sells personal and commercial banking services for people and companies around Xi'an, a city of more than eight million people in western China. With more than 1.2 million customers and 113 branches, it is ranked third in terms of the amount of loans outstanding in Xi'an. Its total assets were about $9.3-billion at the end of 2008.
That makes it tiny in comparison to Scotiabank, which had nearly $500-billion in assets as of Oct. 31. Like other Canadian banks, it has the financial ability to make larger acquisitions in Asia, but is hamstrung by regulations in many countries that prevent foreign banks from taking over local ones.
Instead, Scotiabank executives have decided to take minority positions, then use their bank's influence to try to help the local bank improve loan writing standards, reduce risk and introduce new consumer loan products. Loan underwriting standards are considered to be much looser in China than in North America, in part because incomes are more difficult for bankers to verify.
Although Scotiabank has only held a tiny stake in Xi'an City for the last five years, it has invested significant effort into teaching staff at the Chinese bank to develop better banking skills and to the understanding of products that are still relatively new, such as mortgages.
"When we went in, we really helped them beef up their risk management," said Michele Kwok, Scotiabank's senior vice-president for Asia Pacific and the Middle East. Scotiabank sent the head of information technology from its regional office in Hong Kong to Xi'an to look at the bank's systems and make suggestions; its head of treasury went as well and made recommendations.
"This bank has come a long way - their non-performing loan ratio decreased substantially," Ms. Kwok said.
Scotiabank has signed agreements that - once approved by regulators - will bring its stake in the Chinese bank up to 18.1 per cent, at which point it will have invested $162-million into its interest. It then intends to buy additional shares in the bank from private sources to get up to the 20-per-cent ceiling.
With its higher ownership level, Scotiabank will be entitled to have two directors on the bank's board, up from one, and three senior management representatives, up from one.
Scotiabank is allowed under Chinese rules to own a stake in two local banks and is currently on the hunt for a second.
Elsewhere in Asia, "we've got activities in our pipelines in terms of other strategic investments that are under discussion," Ms. Kwok said. The bank is interested in opportunities in the Philippines, Vietnam and Malaysia, among others, she said.
In February, Scotiabank paid about $270-million to increase its stake in Thailand's Thanachart Bank, bringing its ownership level to 49 per cent. It also finalized terms this summer to acquire a 33 per cent stake, for $15-million (U.S.), in a Chinese fund management company to be established with Bank of Beijing. That joint venture, to be called Bank of Beijing Scotiabank Asset Management Co. Ltd., is still awaiting regulatory approval but should get off the ground in 2010, Ms. Kwok said.