Looking at your own approach in China and that of other banks, what has experience told you is the best strategy?
Marc Poirier: China is a big country. It's best to travel light. In particular, our approach is to make sure we don't get bogged down in expensive legal entities across a range of activities, such as investment banking, fund management or corporate banking. Some foreign banks already have a commercial banking JV, a JV with a fund management house or sometimes two, and a JV with a securities houses. That is a lot of legal entities, with a lot of attendant costs. For SG, China is still a developing market. Yes, it is a top priority, but we are realistic about the state of the market. It is not going to deliver up huge profits overnight. Ultimately, people are spending too much time on regulatory issues such as licenses and legal entities. It means that you have to spend a lot of capital before you see any revenue. I would rather concentrate on a simpler business model. You really need to focus on where your clients are.
What is your view on an investment banking JV?
We believe JVs are a tough proposition given the local market. The process is still not market driven, which partly nullifies the advantages of the best securities houses. For example, there is a quota imposed concerning how many companies a securities house can take to market. And ultimately, it is the China Securities Regulatory Commission that decides who gets to list, and when. There are also difficult new regulations, such as the fact that executives of a securities house are personally liable for the performance and corporate governance of a listed company for up to two years after the IPO.
What's the difference between the approach of a French bank like yourself and the US banks?
The US banks are obviously looking for the mega-deals. You have the corporate banks and the investment banks, and they have quite different models. Morgan Stanley has been clever with its JV with China International Capital Corporation, and they always seem to be on board the big ticket, $1 billion plus, deals. From Europe, you have Deutsche, ABN AMRO Rothschild, SG, BNPP and Credit
What did you first notice about the China market?
The market cap is small, illiquid and not very transparent. In other words, it is simply not very mature. So how can you make money? We had to reorganize ourselves to introduce investment banking activities but not the old securities model of selling research and doing IPOs. In many ways, that model is obsolete and, in the last few years, many banks have changed their business model. Being a pure broker, or a pure banker doesn't work in China. There is no point in simply lending money either because the Chinese banks don't care about the cost of capital and are stuffed with deposits. Chinese banks don't have to answer to shareholders or provide ROE. We do. Given these issues, you have to think carefully where you position yourself in the Chinese market.
So you take a pretty flexible approach to the term 'investment banking' - it is not just about brokerage and underwriting.
Absolutely. We are not here just to raise a small SG flag in any number of Chinese cities, merely in order to have a presence, for which you pay millions of dollars. We don't believe in minority stakes in Chinese banks either. We do invest occasionally, however, as shown in the Czech republic and in Greece, where we took 50% stakes in local banks.
Many foreign players have taken stakes in Chinese banks. What is driving this trend in your view?
I'm not sure about the motivation of some of these deals. Why are some Chinese second tier bank selling shares to multiple third parties? These shares are non-tradable, after all - so hard to cash out of. So what's the added value to the foreign partner? And most important what's is the added value to the Chinese partner? Chinese second tier banks should focus on becoming the best bank they can possibly be, think carefully about who is their best partner, and then finally sell a stake for the highest possible price to this partner. They shouldn't be selling small stakes to whoever wants one. As the market deregulates they should focus on obtaining a real and efficient platform with one major partner.
You are not involved in retail. What's your view on this area?
It is an area which is beginning to develop. But after joining WTO, there have been many more regulations introduced. Ironically, many foreign banks estimate that their market share has gone down since China entered WTO - by up to 50% compared to five years ago. Take auto finance. It opened according to schedule, but it was decided banks wouldn't be allowed to participate - only auto companies. But the Chinese government wants auto companies to inject around $50 million dollars for such an operation, which is $50 million less to use on auto manufacturing and sales in China. In addition, it is not yet possible to securitize loans in China, so the car maker is taking on a huge amount of risk from building the factory, making the cars, trying to sell them, and in addition taking on the risk of financing them.
So where do you position yourself?
Where our competition doesn't expect us. One thing is for sure, we won't be building gas factories.
