Bank of America Expands in China: Just a Flash in the Pan?
When the China Construction Bank (CCB) deal was struck last June – driven not by Bank of America’s (BofA) Asia team but by a core group of bankers and strategists travelling between its base in Charlotte and Beijing – many people wondered what the US bank hoped to gain. After all, here was a conservative bank known more for its plodding gait than bold manoeuvres, particularly not US$3bn ones in uncharted Chinese territory.
In keeping with its image, the US bank issued a rather staid message to stockholders, press and analysts. In return for financial support to its new Chinese partner, BofA would receive the right to offer co-branded credit cards and a 25-year service agreement to offer global treasury services in the country. Having completed what was then the largest single overseas strategic buy-in at a Chinese lender, BofA would also receive a single seat on CCB’s 15-strong board.
Nine months later, the message remains the same. “We’re a big bank but not a big owner of banking assets across the world, and the idea was to make strategic investments in banks in markets where we knew we could grow… China hit our criteria very well,” says Robert Stickler, head of communications for Bank of America’s finance and strategic planning divisions in Charlotte. “At this point we have a beachhead… Bank of America’s treasury services are thriving in China and we’re negotiating a joint venture in credit cards and some other small things which we will be announcing in the coming months.”
But it’s clear from talking to sources close to the bank that the US institution expects far more out of this deal than its official line suggests. It’s true that helping to develop a credit-card business makes good commercial and strategic sense, and also cements a relationship. But all being well, the deal should lead to much greater things.
BofA says its pan-Asia revenues from high-yield debt, equity and credit derivatives, trade finance and syndicated loans are all growing at 20 per cent-plus per year. And there is no reason to believe that BofA cannot offer such high-margin products to CCB’s mainland corporate clients in future, as Beijing further relaxes capital-market rules. Asked if it planned to offer CCB clients a raft of commercial and investment banking services in years to come, one senior source close to the bank answers: “Definitely”.
BofA’s reluctance to make public the true extent of its long-term strategy with CCB should come as no surprise. The US bank is still feeling its way in China, and is keen not to upset key figures in Beijing. “CCB is a tremendous portal for the bank to get access to all those mid-tier and large-sized fast-growing corporates in China that it didn’t have access to before, because it didn’t do their IPOs,” continues the banker. “There is tremendous scope to build up a very profitable franchise here and build on core competencies. There is reasonable traction there already. That’s the low-hanging fruit, and that’s what the bank is looking at with CCB.”
Other sources say that in time BofA hopes to offer everything from high-yield debt services and syndicated loans to trade finance services, cash management and equity and credit derivatives to CCB’s mainland clients. CCB, run by Guo Shuqing, the shrewd former director of the State Administration of Foreign Exchange, will not be fazed by BofA’s broad aims. It will have plans to eventually roll out commercial banking services of its own to Chinese and overseas clients, both regionally and globally. That is likely to happen well within a decade, and working with BofA will only aid its long-term overseas ambitions.
But the CCB deal should not give the impression that BofA is increasingly willing to take risks around the region. Elsewhere in Asia, the US institution is as down-to-earth as ever. Even in its Asia heyday in the mid-1990s, when it offered project finance services in every Asian country and retail outlets in most, it was known as a risk-averse institution. That impression only intensified after the Charlotte-based NationsBank bought San Francisco’s BankAmerica in 1998, slap in the middle of the Asian financial crisis. Rather than expand regionally, the new consolidated board closed large swathes of its Asian operations over the next two years – a decision that still reverberates today.
In 2000, eight of BofA’s senior Asia-based executives mapped out the bank’s regional strategy, deciding what services to retain (trade finance, structured products and foreign exchange) and what to strip out (project finance, equity underwriting and most regional retail banking operations). Colm McCarthy, BofA’s Asian president, helped spearhead the review that put the bank where it is today. “At that time, we hadn’t had a full review of the bank’s operations for a while. That led to implementing the changes that have brought us pretty much stellar success over the past four or five years. We’re into the fifth year now of compound double-digit revenue growth from our client base in Asia.”
The process wasn’t easy – BofA had to drop a clutch of long-term clients that had become passive customers, and find its new role in Asia. That, in large part, can be trimmed down to two key areas. First, offering traditional commercial banking services that make New York investment bankers yawn but rake in steady cash and, increasingly, offering new merchant banking services to key US, European and Asian corporations.
At heart, Bank of America remains a solid, profitable commercial bank. Net income in 2005 grew 19 per cent to US$16.9bn, or US$4.15 a share, though it declined slightly in the final three months of 2005, the first quarterly fall since 2001. The bank does not break down figures by region – a large chunk of its overseas profits, particularly in Asia, are in any case booked in the US.
But Asian revenues are growing fast, says McCarthy. Turnover from its global treasury services (GTS) division – a sector dominated by trade finance and cash management – is growing at 20 per cent-plus, he says, with debt, syndication structuring, sales and trading, product leasing (BofA is a major lessor of new and borrowed aircraft worldwide) also growing near to 20 per cent. That growth rate will continue for the full years 2006-2008, the bank says. Further fast-growing services include equity and credit derivatives, private placements, notably in Australia, and collateralized debt obligations.
BofA bankers say that while figures vary, in a typical year 35 per cent of Asia revenues come from each of its commercial banking and debt departments, with 30 per cent added to the bottom line by sales and trading activities. “We like client revenue – it’s reliable, it’s profitable and it’s repeatable,” McCarthy says. “Cash management, working capital, trade finance, [it’s all] bread and butter that some banks don’t like, don’t think is sexy. Letters of credit are going out of fashion [elsewhere] but not with us. Those are products that happen day in, day out…[they] remind the client that we’re still a bank in the traditional way.”
That attitude explains the rather old-fashioned atmosphere that pervades BofA, though such practicality seems to work. Take trade finance, an area that will grow exponentially in Asia over the coming years. Future Asian revenue streams will increasingly be driven by regional businesses in India, China and Japan trading completed goods and services with each other – and looking to hedge risk by using services such as swaps and derivatives that are staples for BofA. Few institutions other than Citigroup, HSBC and, to a lesser extent, ABN Amro and Deutsche Bank, will be able to compete in this space with BofA’s size, scale and customer base. It’s the type of low-key competitive advantage that also explains why the US bank tends to run under the radar around the region.
“Our treasury management business in Asia is growing very fast, and we expect that to continue,” says Richard Brown, BofA’s regional head for GTS. “I would expect Asian corporates to become more significant providers of services, and that will bring with it banking requirements that will continue to grow and eventually outpace elsewhere. Asia is already comfortably the largest part of our trade finance business worldwide.”
Other traditional merchant banking services are, however, completely absent in Asia, notably equity underwriting, which BofA studiously avoids in the region. It’s odd, given that the bank’s stated international strategy is to export to Asia and Europe products that have borne fruit in the US. Its US investment banking arm, Banc of America, underwrote 625 deals worth US$72bn between 1997 and 2006 year to date, according to Dealogic, a supplier off relationship and transaction management software and information systems for the investment banking industry.
BofA’s McCarthy says the decision not to open an equity house in Asia was part of focusing only on what the bank knew it could do well. There’s also cost to consider. HSBC’s decision to build an investment banking and equities arm on to its hugely successful commercial banking division cost it upward of US$500m in packages recruiting talent, which so far has yet to truly prove itself. That’s money that BofA’s shareholders may think better spent in less risky ways.
Yet the question remains – if trade finance, equity derivatives and high-yield debt offerings work in Asia, why not build a regional equities house? After all, it has the scale and client base to offer pretty much anything it wants. BofA’s McCarthy, however, dismisses the idea out of hand.
“In-country domestic equity in Asia is a tough landscape,” he says. “It’s size and scale, a lot of banks chasing a relatively small market. If we showed up with a newly minted equities house, do [our customers] really need us for that? Chances are, no. Our resources would be better placed elsewhere.”
Besides, he points out, the bank does offer investment banking services; again, just not those at which most Harvard-educated MBA graduates are likely to drool. “We still do leveraged buyouts in Asia. We are one of the largest securitizers of assets regionally, we do equity financial derivatives still, we do highly structured CDOs in Asia, we are the largest placer of private placements in the region. We are still getting very nice revenue from investment banking in those areas [in Asia].”
At least BofA appears to know its own identity in Asia, if not entirely its direction. After all, in the past couple of years, this most conservative, even isolationist, of major US banks seems to have undergone a gentle personality change in Asia as it offers new, higher-yield services to clients.
Some recent deals have caught the eye. Take Indian business outsourcing expert Genpact’s US$215m syndicated loan in February 2005, of which BofA was a lead arranger. Or Infosys’ US$1.05bn follow-on American depositary share (ADS) offering last year, involving the bank as co-manager. Then there was its role as joint lead arranger in Wynn Resorts’ US$744m syndicated loan to build a casino complex in Macau. These are deals that BofA would not have got within a mile of 24 months ago, McCarthy says.
BofA’s approach, according to a Singapore-based banking analyst, is to “wait for clients to come to the door, rather than bashing it down”. That also explains the bank’s reluctance to expand its deal-making divisions aggressively – much to the obvious chagrin of some BofA bankers. But it’s also clear from the deals being done that BofA is offering existing clients new services when they need them – Indian paper sold into Korea; a structured loan for a Taiwan technology firm looking to expand in China; a 144A offering sold from India or Taiwan to US investors.
Increasingly, BofA is able to piggy-back on its existing global clients in Asia, while adding new customers as its regional footprint grows. The bank’s CEO, Kenneth Lewis, has dismissed suggestions that it’s readying for further strategic investments. Following the US$48bn purchase of FleetBoston in April 2004 and the US$34.2bn acquisition of MBNA, completed on 1 January this year, it has hit a monopoly cap in the US, where future growth will be forcibly organic.
Asia, too, is an area where the bank has “no interest” in further acquisitions, Lewis said during a conference call to announce BofA’s 2005 full-year results. CCB, it seems, is BofA’s only gamble. And even if it turns out to be an isolated flash in the Asian pan for BofA, it was at least fun watching them buy the matches.
This article was written by Elliot Wilson.