Niche banking

Financial institutions from the Netherlands, one of the EU’s smaller markets, have proven imaginative and nimble in China’s notoriously challenging financial service sector. Though no Dutch financial firm is able to match the presence of Citibank or HSBC in China, the country’s energetic approach to overseas banking has its benefits.

“The services [Dutch banks] provide and the way they present their products are both unique and innovative here in China,” said Helene Rekkers, economic affairs counselor at the Dutch embassy in Beijing.

Or, as Orlando Wang, general manager of Rabobank’s Shanghai branch, put it: “We each have our own niches.”

Dutch banks offer a wide variety of products spread across asset management, investment banking and retail. They have earned a reputation for excellence in the wholesale and corporate loan business as well as in project finance.

“Dutch banks were relatively early into the [Chinese] market,” said Piter de Jong, general manager of ING’s Shanghai bank branch.

Financial pioneer
The banks moved to China when Netherlands-based conglomerates like Philips arrived in the country. ABN AMRO was one of the first to put down roots, opening a representative office in Beijing in 1985. It was a pioneer as foreign financial institutions began marketing their wealth management products to China’s rich.

In October of last year, ABN AMRO was acquired by a consortium comprising Fortis, Royal Bank of Scotland and Santander in October 2007. This has caused a shakeup in the landscape of Dutch banks operating in China, with ABN AMRO’s local operations due to be taken over by Royal Bank of Scotland.

“ABN AMRO was particularly strong in payment and cash management services,” said de Jong. “[But] a lot of its Dutch clients were scared by the takeover and are now turning to other Dutch banks covering China.”

One of those banks, ING, relies on its extensive presence across Asia as well as a China operation that covers a host of financial services: insurance, fund management and real estate as well as retail, wholesale and private banking.

Double insurance
ING is in the unusual position of having two insurance joint ventures in China. ING Capital Life, a partnership with Beijing Capital Group, started in 2002, while Pacific Antai Life, which is run in collaboration with China Pacific Insurance, came under ING’s control through its acquisition of Aetna in 2000.

In addition to insurance products, ING is amassing local experience at the corporate level. A key development was ING’s acquisition of Asia-focused investment bank Barings. Suddenly, the Dutch bank had access to Barings’s valuable corporate customers and, more importantly, its extensive connections to local government around China

This paid off handsomely as ING’s lobbying for Belgian-based Interbrew helped the multinational brewer buy its way to the second-largest share of China’s beer market. ING also arranged loans for Interbrew’s Chinese acquisitions and has been keen to offer similar services to China’s blue chip corporations. So far, the bank has secured work as a bookrunner and arranger of loans for the likes of Air China and Sinopec.

ING’s 19.9% stake in Bank of Beijing, the country’s second-largest city commercial lender, allows it to distribute insurance and wealth management products while getting a foothold in the local retail banking scene. ING has helped Bank of Beijing improve its risk management and retail banking products.

De Jong describes the Bank of Beijing buy-in as “great investment.” He claims the stake has doubled or tripled in value since ING purchased it, and future investments are in the works.

“Every foreign bank in China would like to take the maximum allowable stakes [in two local banks],” de Jong said.

Rabobank, meanwhile, has entered the local market by leveraging its traditional strengths in the agribusiness sector. Rather than buy into city commercial banks, its exposure to the Chinese retail banking market comes through stakes in rural lenders.

A 10% stake in the United Rural Cooperative Bank of Hangzhou has proven profitable, said Rabobank’s Wang, adding that the lender’s 2007 financial results beat forecasts. Rabobank has also signed memorandums of understanding with banks in Tianjin and Liaoning to set up similar ventures and is considering local incorporation in China.

Despite this focus on rural cooperatives, Wang insists that corporate customers do not go neglected. To this end, Rabobank attaches great importance to its research capacity. A four-strong team in Shanghai churns out reports on 20 areas of China’s agribusiness sector which are popular among investors following the global commodity markets.

“If you want to be successful in China, you have to be a universal bank,” explained Wang.

More recently, Dutch investment interest in China’s financial sector has been counterbalanced by Chinese firms looking for opportunities in the Netherlands.

Late last year, Ping An Insurance recently took a 4.9% stake in Belgo-Dutch giant Fortis. The Chinese firm deepened its involvement in March through the purchase of 50% of Fortis’s investment management arm for US$2.1 billion. The unit has since been renamed Fortis Ping An Investment Management.

The deal made perfect sense, according to Maaike Steinebach, manager of Fortis’s Shanghai branch. Keen to become a major international player, Ping An can use Fortis as a platform from which to build its portfolio of overseas stocks under the Qualified Domestic Institutional Investor scheme. Although larger than Fortis – Ping An’s market capitalization is US$76 billion compared to Fortis’s US$56 billion – the Shenzhen-based firm lacks the management skills and sophisticated products that Fortis offers.

For Fortis, it was first and foremost an injection of capital, which was much needed in the wake of the group’s joint acquisition of ABN AMRO’s Dutch operations. However, Fortis also saw it as an opportunity to expand its business in China through tapping Ping An’s strong domestic distribution network.

Patience pays off
Beijing’s cautious approach to overseas involvement in the domestic financial sector means that foreign firms must be patient in trying to break new ground.

In this respect, the memorandum of understanding signed by the China Banking Regulatory Commission and the Dutch Central Bank in January represents a significant step forward. It suggests that China recognizes the unique contribution the Netherlands is making to the financial sector and welcomes the chance to deepen ties between their respective financial institutions.

“Dutch financial institutions’ experience in financial markets has contributed a lot to China’s emerging market,” said Rekkers of the Dutch embassy.