UBS in partnership talks with Bank of China

China's banks should be opened to foreign investors in 2006 Keystone

Switzerland’s largest bank, UBS, says it is negotiating with Bank of China (BOC) about a future partnership.

In a statement on Thursday, UBS said there was also “the possibility” that it would invest about $500 million (SFr600 million) to become a strategic investor in BOC.

UBS said the “mutually beneficial” partnership would include commercial cooperation “in certain areas of investment banking yet to be agreed”.

The statement added only that talks were continuing and further details were confidential.

The official confirmation follows reports that UBS is negotiating a multi-million dollar stake in BOC – a move that could increase its chances of winning a lucrative advisory mandate for the Chinese bank’s forthcoming foreign stock exchange listing.

UBS CEO Peter Wuffli told swissinfo earlier this year that Asia – particularly China and Japan – were top of his priority list in terms of future regional growth opportunities.

Speaking after the bank’s annual conference, at which he announced record net profit of over SFr8 billion, he said the region represented an “attractive opportunity” with “impressive” growth rates.

UBS, which two years ago became the first foreign bank to be allowed to trade on the Beijing stock exchange, wants to increase its Asia-Pacific region revenues from their current ten per cent of the total to at least 15 per cent.

Lost opportunity

The Financial Times newspaper reported on Tuesday that news of the talks had emerged just a few weeks after US banking giant Citigroup lost a mandate to underwrite the overseas listing of BOC rival China Construction Bank (CCB).

The mandate for the listing, the total value of which is estimated at about $5 billion, was reportedly lost because Citigroup was not prepared to carry through on pledges to invest in CCB as a pre-condition for being selected.

Bank of America Corporation subsequently announced a definitive agreement to buy a nine per cent stake in CCB for $3 billion.

The BOC listing is estimated to be worth $3 to 4 billion.

However, observers point out that the total underwriting fees generated would probably not exceed $150 million, shared among different banks – significantly less than the likely cost of a stake in one of China’s “Big Four” banks.

Helvea analyst Peter Thorne commented: “Our first reaction is one of relief, but not great surprise, that the [$500-million] investment is not of the same magnitude as the $3 billion that Bank of America is investing.”

Gang of Four

BOC, China’s oldest bank and the most consistently profitable, is the second largest in the country after the Industrial & Commercial Bank of China, and one of the so-called “Big Four”.

All four promised to open their business to foreign financial institutions by 2006, following China’s entry into the World Trade Organisation (WTO).

UBS, the world’s largest wealth manager and one of the largest global asset managers, is also a major player in investment banking and securities trading.

Investment banks act as underwriters or agents for corporations (or other bodies) that issue securities (i.e. bonds, shares).

Most such banks also carry out broking and dealing operations, as well as maintaining markets for previously issued securities and offering advisory services to investors.

They also play a large role in merger and acquisition activities, private equity placements and corporate restructuring.

swissinfo, Chris Lewis in Zurich

Key facts

China’s “Big Four” banks are BOC, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China.
BOC’s business focuses on traditional commercial banking, and comprises corporate banking, retail banking and banking with financial institutions.
China has promised to open all banking business to foreigners by 2006.

In brief

China is home to 1.3 billion people, who represent around 20 per cent of the global population.

Annual growth (GDP) has increased by an average of eight per cent over the past decade, and China now ranks as the seventh largest economy in the world.

According to Switzerland’s State Secretariat for Economic Affairs, Swiss direct investment in China is estimated at about SFr5 billion, putting Switzerland 15th in global terms.