Agricultural Bank of China (ABC) is looking at bringing in foreign and domestic strategic investors before it lists on the Shanghai Stock Exchange by the end of the year. While at least one domestic investor has been confirmed – China’s National Social Security Fund announced that it will invest US$2.93 billion – it’s not certain whether or not ABC will bring in a foreign investor.
One reason is the strict requirements ABC has laid out for potential foreign investors: They must have clean and strong financial records and specialize in rural banking. The first requirement alone excludes many North American and European banks, whose balance sheets have been hurt by the financial crisis. While it is understandable that ABC wants partners that it can depend on financially and for strategic advice, the requirements only leave a few international banks open to consideration, including France’s Crédit Argicole and Canada’s Bank of Montreal.
If ABC finds a foreign investor, will it give ABC the risk management assistance that it needs? The other big state-owned banks – Bank of China, China Construction Bank, and Industrial and Commercial Bank of China – also tried to bring in foreign strategic investors before their listings. The foreign banks offered to help with risk management systems and balance sheets, but their assistance had little impact. There were allegations that this was because the foreign banks were not allowed much day-to-day management control, and there are said to have been cultural clashes. Once the financial crisis hit and foreign banks’ lock-up periods ended, they quickly sold their stakes.
ABC may find that a better way lies in simply passing on outside help. Pursuing only domestic investors would lower the risk of management and cultural clashes, and may be more likely to produce a partner with a strong financial position able and willing to remain invested in the bank for the long term.
ABC – like any IPO candidate – needs to consider the long term in its search for strategic investors. A strong investor, by adding credibility to the IPO, will make it more attractive for both institutional and retail investors, and help to support ABC’s share price over a period of time. That will benefit ABC much more than a rally stemming from a brief association with a high-profile foreign firm.