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ICBC and Standard Bank: Growing Global Case

Author: Author: Peter Williamson Online Pub Date: March 06, 2016 | Original Pub. Date: 2012 Subject: Strategic Alliances, Globalization & Business, Mergers & Acquisitions Level: | Type: Direct case | Length: 8616 Copyright: University of Cambridge, Judge Business School. © 2012. All rights reserved Organization: Industrial and Commercial Bank of China (ICBC)| Standard Bank Group | Organization size: Large Region: Eastern Asia, Southern Africa, Global | State: Industry: Financial service activities, except insurance and pension funding Originally Published in: Williamson, P. ( 2012). ICBC and Standard Bank: growing global. Cambridge: University of Cambridge, Judge Business School. Publisher: University of Cambridge, Judge Business School DOI: http://dx.doi.org/10.4135/9781473974357 | Online ISBN: 9781473974357

SAGE © 2012

SAGE Business Cases

University of Cambridge, Judge Business School. © 2012. All rights reserved This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2020 SAGE Publications Ltd. All Rights Reserved. The case studies on SAGE Business Cases are designed and optimized for online learning. Please refer to the online version of this case to fully experience any video, data embeds, spreadsheets, slides, or other resources that may be included. This content may only be distributed for use within Royal Holloway University of L. http://dx.doi.org/10.4135/9781473974357

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ICBC and Standard Bank: Growing Global

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Abstract This case examines the globalisation process of ICBC, one of China's leading banks. Specifically, it explores the path-breaking US$5.46 billion acquisition in 2008 of a 20% shareholding in Standard Bank based in South Africa and the associated strategic partnership between the two banks to develop their global business. The case traces the complete acquisition cycle, starting from developing a strategy, initial contact between the banks, through the assembly of an acquisition team, due diligence process, deal making and regulatory approval, and the management of post-acquisition integration and development of their global strategic partnership. These issues are examined from both the ICBC and Standard Bank perspectives. It thus provides a vehicle to explore the potential of cross-border acquisitions and partnerships between Chinese and foreign companies to ...

Case

“It is my great pleasure to announce today that the Boards of ICBC and Standard Bank have reached agreement to form a strategic partnership between our two institutions. This partnership will be cemented by ICBC's investment in Standard Bank and our business cooperation will cover a broad range of areas, including trade finance, international settlement, treasury, investment funds and so on.” Jiang Jianqing, Chairman of ICBC, presentation to investors, 25th October 2007 It was with these words that ICBC's Chairman Jiang publicly introduced the idea that would see ICBC acquire a 20% stake in Standard Bank Group of Africa for ZAR36.7 billion (equivalent to US$5.46 billion at the exPage 3 of 16

ICBC and Standard Bank: Growing Global

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change rate prevailing on the day the deal was announced, and US$4.72 billion on closing day in March 2008) making ICBC the Standard Bank's largest single shareholder. This transaction was the largest single out-bound investment in the history of Chinese enterprises, it was also the largest, single foreign direct investment into South Africa to that date. Despite the significance of the transaction, however, it only heralded the beginning of cooperation between the world's largest bank and Africa's largest bank. The deal would open the way to a vibrant strategic partnership that would see the two banks work together to develop new business throughout Africa and subsequently in Latin America, Russia and Eastern Europe, Asia and other parts of the world across a growing range of products, services and trading activities. For ICBC, the partnership represented another important step along the road to becoming a leading global financial institution. As well as promising a good investment return, it would provide ICBC with a solid foundation for long-term future growth in key emerging markets, starting with Africa and hence would further its global strategy. For Standard Bank the partnership would help further develop the bank's international business by positioning it at the crossroads of substantial and growing trade and investment flows between China and the African continent and beyond, while substantially increasing the capital base available to underpin its future growth.

ICBC The Industrial and Commercial Bank of China (ICBC) is the largest commercial bank in the world by market capitalisation and net income. It is listed on the Stock Exchange of Hong Kong and the Shanghai Stock Exchange. At the time the deal with Standard Bank was announced (at the end of 2007), ICBC had total assets of RMB 8.7 trillion (US$1.2 trillion) and provided financial products and services to more than 2.72 million corporate banking customers and 170 million personal banking customers through its 16,476 branches in the People's Republic of China as well as 112 branches outside China. It employed 381,713 people. ICBC had the leading share of the market in China with 16.5% of total assets, 17.1% of total deposits and 15.6% of total loans. It had a capital adequacy ratio of 13.09% and Tier 1 Capital Ration of 10.99%—the highest in Asia. ICBC had been formally separated from the People's Bank of China and separately incorporated in January 1984. In the early years ICBC relied on correspondent banking relationships with banks around the world to conduct its limited international business. The bank's international expansion began in 1992 when it set up a representative office in Singapore. During the first phase of internationalisation ICBC focused on organic growth, upgrading the Singapore office to a branch, and applying for banking licences in different markets where it could serve its Chinese client base. Some licences came quickly, while obtaining a licence in other jurisdictions proved a protracted process; in the USA, for example, ICBC began the process of applying for a licence in 1994 but the licence was only finally granted in 2008. As Hu Hao, Secretary to the Board and head of the Corporate Strategy and Investor Relations Department observed: “the organic (or greenfield) internationalisation strategy was safe, but it is also slow; it tends to be limited mainly to following overseas clients and reduces the ability to become truly localised.” A second phase of internationalisation began in the year 2000 when ICBC began to undertake acquisitions overseas, especially in Asia, in parallel with continued organic growth of its international business. In August 2000, for example, ICBC acquired Union Bank of Hong Kong Limited, which had been established in 1964 and publicly listed in 1973. ICBC acquired Fortis Bank's Hong Kong retail and commercial banking operations in April 2003 and Hong Kong-based Chinese Mercantile Bank in 2004. Through these initiatives, ICBC's overseas network was greatly enriched, especially in Hong Kong, In a third phase, after 2005 ICBC's pace of internationalisation accelerated. Organic growth still played the largest part, but the bank also made further acquisitions, such as: a 90% share of Halim Bank Indonesia, a local bank with 12 outlets covering the major cities and regions of Indonesia, in 2006; and 79.93 per cent of Seng Heng Bank, the largest local bank in Macau, in 2007. Most of these acquisitions were relatively small and aimed at providing a platform for future growth in the country rather than immediate market share. These limited overseas investments compared with the US$22 billion ICBC had raised in its initial public offering (IPO) in October 2006 on the Hong Kong and Shanghai exchanges. Over a quarter of the proceeds of Page 4 of 16

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the IPO were raised in US dollars that could not be exchanged into Chinese Renminbi, yet were depreciating every day with the relentless decline of the US dollar against most other currencies. ICBC needed to diversify its asset base. It also wanted to reduce reliance on net interest margin as a source of revenue and increase its revenues from services and fee generation (the structure of ICBC's business and international expansion is detailed in Exhibits 1 & 2). Chairman Jiang's vision was to cover 50 countries across 5 continents by the end of 2014. He wanted ICBC to continue to aim at developing and becoming a global leading bank with “the best profitability, performance and prestige” (commensurate with China's place as the world's second largest economy). In tandem with the rapid growth of China's economy for nearly 30 years, ICBC had become the most profitable commercial bank in the world with the highest market capitalization of any bank. But in order to maintain sustainable growth, ICBC had to constantly refine the strategy which guided its international expansion. Chairman Jiang emphasised that effective strategy had to be about the long .” He saw the first step in ICBC's internationalisation strategy (5–10 years) should be to build leadership in Asian regional and other emerging markets because these were most promising. The second step (from 10 to 20 years out) would be to become a leading bank globally. “Maybe the long history of Chinese culture”, he observed, “encourages us to look at the long term.” As part of this internationalisation strategy, ICBC had been investigating various ways to capitalise on the substantial and growing trade and investment flows between China and the African continent. In recent years, GDP of the countries in sub-Saharan Africa had maintained steady growth (in 2008 despite the global financial crisis, for example, sub-Saharan African countries had notched up the fifth consecutive year of GDP growth of over 5%). With rich natural resources and great market potential, and urgent development needs in infrastructure, energy and manufacturing industries, Africa had become the most important market for Chiital, mature industrial manufacturing technology and strong infrastructure building capacity, made the Chinese and African economies strongly complementary. As the largest commercial bank in China with domestic clients “going global” at a rapid pace, it was almost inevitable that ICBC would enter African markets. Collaboration with, and investment in, Africa's leading financial institution to develop African markets was an appropriate entry route, taking into account the scale of the African economies, their political environments and local market conditions. Chairman Jiang felt that: “Africa has suffered a great deal in history; it was seen as ‘peripheral’ to the global economy by many for decades; but now it is a critically important player in the global market.” The partnership with Standard Bank promised to lay the foundation to grow ICBC's business in serving this trade and investment and to facilitate growth of trade and investment between ICBC's clients and Africa. It would also provide ICBC with the critical mass it needed. As Chairman Jiang observed: “a small initiative couldn't cover a large and complex continent.” ICBC also viewed Standard Bank Group's extensive activities in markets outside Africa as another platform which could further contribute to the growth of ICBC's international activities and was attracted by Standard Bank Group's plans to expand its African and international networks and capabilities.

Standard Bank Group Standard Bank Group is the largest banking group in South Africa and Africa. At the time of the deal it had total assets of US$ 156 billion with more than 950 branches in 38 countries. It employed over 46,000 people. Standard Bank was founded in 1862 in the Cape Province of South Africa. It was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold was discovered there in 1885. In 1969 it merged with the LondonPage 5 of 16

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based Chartered Bank that had built extensive operations in India and East Asia since its establishment by Royal Charter in 1853 to form Standard Chartered Bank Plc. In 1987 Standard Chartered sold its 39% stake in Standard Bank Group, transferring complete ownership of the holding company to South African investors. Standard Chartered, however, kept the other operations in Africa. Despite being reduced to its core in South Africa, Standard Bank had a vision of building a franchise that spanned Africa and other emerging markets at a time before the potential of emerging markets had become fashionable. So in 1988 Standard Bank Group began to re-establish its African network, starting with branches in Swaziland and Botswana. In 1992 it acquired ANZ Grindlays' operations in Botswana, Kenya, Uganda, Zaire, Zambia and Zimbabwe, and minority holdings in banks in Ghana and Nigeria. In 1999 it entered the bancassurance business, combining banking and life assurance services, through the acquisition of Liberty Life. In 2001 Standard Bank acquired Jardine Fleming Bank in Hong Kong and Commercial Bank of Malawi, followed by the acquisition of Uganda Commercial Bank in 2002. In 2003 Standard Bank established investment banks in Russia and Brazil and acquired control of Banco Standard Totta de Moçambique. In April 2007 took control of BankBoston Argentina and renamed it Standard Bank Argentina. As a result of these moves, Standard Bank had built a strong “on-the-ground” presence across much of Africa and a number of other important emerging markets. The three main pillars of the business were Personal & Business Banking, Corporate & Investment Banking, and Liberty Life. In corporate and investment banking Standard Bank maintained a specific focus on industry sectors that were most relevant to emerging markets and have strong sector value propositions in: mining & metals; oil, gas & renewables; telecommunications & media; power & infrastructure; agribusiness and Financial Institutions. Among these, Standard Bank's experience in commodities and mining was particularly strong and it had been a significant player in trading on the London Metal Exchange for many years (Standard Bank Group's structure and financial position is summarised in Exhibits 3 & 4). John Helenius (Jacko) Maree, Standard Bank Group's Chief Executive since 1999, was a strong believer in the potential of a bank focused on the needs of emerging markets and leveraging experience and networks across Africa in particular. And by early 2007 it was clear to Jacko Maree that the China–Africa axis would offer huge opportunities for the development of this business. He later recalled that two events had stuck in his mind: the meeting of all heads of African States that took place in Beijing in 2006 and the meeting of the African Development Bank in Shanghai in May 2007. Maree attended the second of these meetings and the fact that during the breaks he was surrounded by representatives of Chinese companies seeking to understand how to enter business in Africa confirmed what he had begun to sense: that the time for serious trade and investment relations between China and Africa had come. One of the challenges Standard Bank faced in leveraging these opportunities was the need to raise new capital for future growth. The bank had grown its earning per share a compound average rate of 20% since the demerger from Standard Chartered in 1987. To continue this rapid growth it would need to increase its capital base. As one of the largest companies listed in Johannesburg, a market with limited size and depth, combined with South African exchange controls, however, raising a large amount of new capital would be difficult. A number of other South African companies such as Old Mutual and South African Breweries had side-stepped these constraints by moving their listing to the London Stock Exchange. But Standard Bank has chosen to stay on the Johannesburg exchange.

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ICBC and Standard Bank: Growing Global

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Chairman Jiang and CEO Jacko Maree had first met at the International Monetary Conference (IMC)—an annual meeting of the CEOs/Chairman of the world's largest banks—that was hosted by the major Chinese banks in June 2005 in Beijing. The two men had an informal meeting at which they had discussed the global outlook and other common interests. Their paths crossed several times over the next two years at international conferences such as The World Economic Forum in Davos. Maree recalled that these meetings planted a seed: “in the back of my mind: that if one day a big Chinese bank became seriously interested in Africa, there might be potential for some kind of partnership.” In June 2007 the annual meeting of the IMC took place in Cape Town, this time hosted by Standard Bank. On his way to this meeting Chairman Jiang and CEO Maree met in Johannesburg. They spent a day talking about the potential of the largest bank in China and the largest bank in Africa to team up in some way to tap into the potential of growing trade and investment between these emerging markets. From these discussions the idea of forming a “strategic cooperation” emerged. A number of meetings between senior officers of Standard Bank and ICBC followed. Under the leadership of Chairman Jiang, the ICBC team was headed by Dr Pan Gongsheng, Secretary to the ICBC Board whose team managed ICBC's IPO and who holds a Ph.D. in economics from Renmin University and was senior research fellow at the Judge Business School at Cambridge University. Under CEO Maree, the Standard Bank team was led by Robert Leith, then the head of Standard Bank's international businesses, with long experience in global corporate and investment banking who had also run the Bank's subsidiary in London. The teams identified a great deal of potential for a fruitful strategic partnership between the two banks including joint marketing, customer referrals, joint products in corporate banking, investment banking and resource deals, global trading and treasury operations, risk management and even personal and business banking. Opportunities were also identified for technology transfer to capitalise on the respective strengths of the two organisations, information exchange to support business expansion in their complementary geographies and centralised procurement. Based on this analysis the teams drafted a joint “strategic partnership agreement” to provide a framework under which these potential benefits could be achieved in practice for consideration by the banks' respective boards. This would see ICBC and Standard Bank become the “partner of choice” for each other's emerging markets business (although the cooperation would be “non-exclusive”). Chairman Jiang was enthusiastic about the prospect of this strategic partnership, but he felt it would be greatly strengthened if it were cemented by a long-term strategic investment by ICBC in the equity of Standard Bank. He proposed this idea to CEO Maree. Maree discussed this with the then Chairman of Standard Bank Derek Cooper. In addition to cementing the partnership an infusion of new capital was attractive as a way of underpinning Standard Bank's growth objectives. They initially proposed that Standard Bank issue new shares equivalent to 10% of the...