BBVA moves into China acquiring a stake in Citic

Banco Bilbao Vizcaya Argentaria (BBVA), SpainÆs second largest bank, has become the newest entrant into the China-Hong Kong banking arena acquiring 5% of China Citic Bank and 15% of Citic International Financial Holdings (Citic International) for Ç989 million ($1.27 billion).

BBVA is spending Ç501 million for a 5% stake in Citic Bank with an option to increase the stake to 9.9%. The balance of Ç488 million has gone to buy a 15% stake in Citic International. BBVA said its stake in Citic International ôcould increase in the coming monthsö and that ôthe alliance between BBVA and Citic covers the development of retail and corporate banking in mainland China and Hong Kong, one of the fastest growing markets in the world, via Citic Bank and/or Citic Internationalö.

As part of the agreement, BBVA will have one director on the board of Citic Bank out of a total board strength of 15 and two on the board of Citic International out of a total of six.

The move is part of BBVA's expansion plan in Asia. In its statement, BBVA draws attention to the benefit to Citic group commenting that the deal will help Citic to realise its vision ôto build a leading international banking franchise through the backing of an important global partnerö.

The agreement between BBVA and Citic encompasses the entire Asian region and is not restricted to Greater China. Chief financial officer of BBVA, Manuel Gonzalez Cid, said in a conference call with analysts after the transaction announcement on November 22: "We are not speaking of a financial stake, rather an in-depth strategic alliance that could lead to several developments in the future".

Citic Bank is the seventh largest bank in China with 13,485 employees and 416 branches. Citic International is the tenth biggest bank in Hong Kong with 1,711 employees and 38 branches. BBVA operates in 32 countries through 7,465 branches and has 96,369 employees. The bank is in expansion mode and recently announced the completion of a $2.2 billion acquisition of Texas Regional Bancshares which it started in June. The China announcement comes close on the heels of the US consolidation.

Over the last few months several other banks have been named as suitors for Citic including China Life Insurance, Barclays, GE Capital, Grupo Santander and BNP Paribas.

The price for 5% in Citic Bank translates to a multiple of about 3.3 times book value and for Citic International to about 1.62 times book value based on forecast 2006 numbers. At these multiples the deal seems expensive compared to other recent bank deals. However, comparisons are difficult given the differing levels of control in each case and the asset liability profiles of the targets.

Citic has probably commanded an aggressive valuation because of the recent strong trading performance of Chinese banks post IPO. Most international banks perceive having a presence in China as critical to their future growth strategies and the limited number of attractive partners still available would have played a role in Citic commanding this price as well. BBVA becomes the first Spanish bank with a presence in China.

In early trading BBVA shareholders seemed to welcome the news as the share gained about 1% to Ç19.42. Citic International ended at HK$5.81 ($0.75) on Tuesday and was suspended from trading early on Wednesday. Other bank shares gained on Wednesday with Industrial & Commercial Bank of China up 1% and China Construction Bank up 1.4%.

JPMorgan advised Citic International while Merrill Lynch advised Citic Bank. Rothschild advised BBVA on the transaction.