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RBS: snakes and ladders

11th April 2005
By IB Staff Writer

Royal Bank of Scotland (RBS), the second-largest banking group in Europe, has emerged as one of the front runners to acquire a stake in China's second largest bank. Such a move could prove very successful for RBS given the size of the market available to it, however it should not underestimate the challenge of coming to terms with Chinese business culture.

Speculation as to a possible move into China by RBS comes on the back of the announcement by the Bank of China that it was negotiating with a number of large western financial institutions. The Chinese bank, which is planning an IPO next year, is keen to get western banking expertise on board in return for a 20% stake. Under Chinese law, 20% is the maximum amount a single foreign investor can hold in a Chinese bank, and the stake is rumored to be valued at around $4 billion.

Earlier this year, RBS reported a 14% increase in its annual pre-tax profits, largely as a result of the group's appetite for overseas acquisitions. The bank's $10 billion purchase of Charter One resulted in around a quarter of its 2004 profits coming from the US. Other purchases included Ireland's First Active and the credit card business of People's Bank in the US. While the bank reiterated that it was not planning further acquisitions in the near future, it is no secret that the group is keen to build a significant presence in Asian markets.

If the rumors are confirmed, RBS will be following in the footsteps of HSBC, Citigroup and Standard Chartered, all of which have already taken large stakes in Chinese banks. The market is particularly attractive to foreign entrants because of the formidable size of the population. The Chinese government is also keen to open the market to overseas investors to fulfill one of the pre-conditions for the country's forthcoming membership of the WTO.

However, investors should not underestimate the problems involved in a tie-up with a Chinese financial institution, with considerable question marks hanging over corporate governance standards in the country. In addition, many foreign entrants have found it extremely hard to compete with the presence of large domestic banks, many of which boast networks of tens of thousands of branches across the country.

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