US firm Citigroup, one of the world's leading financial services firms, has cleared the way for it to bid for a stake in Guangdong Development Bank (GDB) by ending the clause with its current Chinese partner which says it cannot invest in other Chinese lenders.

"The move is necessary for Citigroup to lead a bid of about 22 billion yuan (US$2.7 billion) for 85 percent of GDB, as the US giant agreed in 2003 that it wouldn't invest in a second bank," an analyst with Merchant Securities told China Daily.

Citigroup bought 4.62 percent of the Shanghai Pudong Development Bank (SPDB) in 2002 and "will increase its stake to 19.9 percent," according to a statement from the Shanghai-based lender on Saturday.

According to Shen Si, board secretary of SPDB, the Shanghai lender has agreed to the waiver as long as GDB avoids direct competition with SPDB. Furthermore, Citigroup is prohibited from setting up credit-card operations with GDB.

As compensation, Citigroup will continue its investment in SPDB and try to make SPDB an outstanding commercial bank within five years, the company statement said.

The struggle for a stake in GDB is part of Citigroup's commitment to tap into China's US$1.7 trillion household savings market after missing a chance to invest in China Construction Bank, one of the country's four largest State-owned banks.

Sources said Citigroup, with its partner China National Cereals, Oils & Foodstuffs Corp (COFCO), is bidding against groups led by France's Societe Generale and Ping An Insurance (Group) Co, China's second-largest insurer. Ping An is teaming up with ABN Amro Holding NV, the biggest Dutch lender while Societe Generale is working with the Huawen Group.

Amongst the three bidders for GDB, the Citigroup bidding team has offered the highest bidding price of more than 2 yuan (24 US cents) a share. Citigroup wants between 40 percent and 45 percent of GDB for itself.

ABN AMRO's price was about the same as SocGen's, at nearly 2 yuan (24 US cents) a share.

The proposed bids value GDB at more than twice its book value, higher than the price paid this year by Bank of America Corp for shares in China Construction Bank.

An official with the China Banking Regulatory Commission (CBRC) told China Daily the industry watchdog would treat GDB as a special case, allowing foreign investors to take over 25 percent of its shares, exceeding the existent cap.

GDB, set up in 1988, had 344.5 billion yuan (US$41.6 billion) of assets at the end of 2004 and 215.7 billion yuan (US$26.6 billion) of outstanding loans, according to the bank's website. The bank has 26 branches in cities including Guangzhou, Shanghai, Beijing, Zhuhai and Nanjing.

Despite its bad debts, GDB is popular with many foreign investors due to its national network, favourable geographical location and middle-size, experts said.

"Compared with a minor stake in the 'Big Four,' foreign investors can spend much less money but take a controlling stake and enjoy GDB's national network," said one. "Besides, the credit card business, an important source of profit for foreign lenders, is the strong point of GDB."

As one of the first banks to launch credit cards, GDB has issued over 2 million since 1995.

According to a survey from PricewaterhouseCoopers in early November, more than 70 percent of foreign banks surveyed predict an annual revenue growth rate of at least 30 percent for 2005 that will continue over the next three years.

Foreign banks believe that credit cards, mortgages and investment products will become increasingly important in the Chinese retail-banking sector in the next three years.

To further increase their market presence, most of the respondent banks would choose organic growth, followed by partnering with a joint stock commercial bank and then with one of the "Big Four" commercial banks.

(China Daily December 27, 2005)