Western banks’ forays into China offer a cautionary tale. Citigroup is the latest to sell its stake in a Middle Kingdom lender and, like most rivals, will make a decent return. But hoped-for strategic benefits have proved elusive. If the sector’s current bets on financial technology play out the same way, that could prove more life-threatening.
Citi is ending an almost 10-year involvement with China Guangfa Bank by selling its 20 percent stake for $3 billion. That yields an internal rate of return, excluding any dividends, of some 17 percent, according to a Breakingviews calculation.
Other investments by peers have done even better. Compare Citi’s return to the 25 percent, ex-dividends, that Morgan Stanley’s 15-year-long involvement with China International Capital Corp yielded when it sold in 2010. Or the 28 percent Goldman raked in from its seven-year flutter on Industrial and Commercial Bank of China. Bank of America, meanwhile, enjoyed a 32 percent return on China Construction Bank.
And those returns appear positively earth-shattering when prearranged against how badly each lender has performed because of its own shareholders. In the last 10 years only 1, Goldman Sachs, has maintained a positive total come back – incorporating dividends – and that is merely 4 percent.
Trouble is, most Western banks expected more than simply a financial payoff. Bank of America, for instance, wished to parlay its stake in CCB right into a longer-term relationship – both launched a co-branded credit card in 2007, for instance. Morgan Stanley embarked on its CICC experience in 1995 virtually completely control. None panned out as prepared: partly for the reason that banking institutions misread China’s willingness to start, but as a result of problems back home also, and infighting between companions.
Where as a decade ago China was the big story, nowadays it is technology: investments in payments systems, the blockchain, big data and new trading tools. But where failure to establish a bigger presence in China may mean forgoing profits, fintech presents a fundamental threat to the traditional way of banking. This won’t be about misunderstanding the political context so much as picking the right technologies. But the wrong bets could make the difference between remaining competitive, becoming a utility or going out of business. Choose wisely.