Bank of Communications (stock code: 601328) is seeking a 10 per cent stake in Changshu Rural Commercial Bank as the mainland's fifth-largest lender looks to expand in the country's affluent Yangtze River Delta region.
The deal has been submitted to the regulator for approval, a source with knowledge of the transaction said yesterday. Neither of the two companies would comment.
The source did not disclose the price of the purchase but He Sheng, a banking analyst with Changjiang Securities, valued the stake at 500 million yuan, double the Changshu lender's book value.
"The share purchase would be of strategic value to Bank of Communications as the Shanghai-based lender seeks a fast track into the neighbouring markets," Mr He said. "It will be a small deal for [the bank] in terms of value but it may spawn similar asset buying in future."
The deal could become the Bank of Communications' first investment in another lender since its plan to acquire 85 per cent of Hubei International Trust & Investment Company for 1.22 billion yuan.
The lender, 18.6 per cent owned by HSBC Holdings, was embarking on acquisitions to expand its network, sources said.
The bank has more than 600 branches across the Yangtze River Delta, where lenders vie for a bigger share by expanding networks.
Changshu, a city in Jiangsu province, 100 kilometres northwest of Shanghai, has a population of one million.
The Changshu rural bank has 42 branches and 72 sub-branches. It raked in sales of 972 million yuan last year with 623 million yuan derived from interest income, according to its website.
The lender earned a combined 580 million yuan in net profit between 2002 and 2005. It did not announce its net profit for last year.
The lender evolved into a commercial bank in 2001 when the central bank reformed the first batch of rural co-operatives in a trial programme. Its total assets at the end of last year stood at 24.43 billion yuan.
"Some of the rural commercial banks in the Yangtze River Delta are attractive," said He Fuqiang, a director at Beijing ZHY Money & Bond Market Investment Consulting Centre. "The dynamic economic growth and the credibility of the residents definitely whet the buying appetite of investors."
Since 2003, Beijing has been striving to revamp the banking industry in rural areas in an effort to bolster the rural economy and improve the well-being of farmers.
Liu Mingkang, chairman of the China Banking Regulatory Commission, in December said that the regulator planned to waive rules on rural lenders by giving them more flexibility in setting deposit and lending rates.
Rural lenders are encouraged to offer loans to small rural companies that were given tax incentives and subsidies.
However, it will be some time before the rural banks find their day in the sun, as they have been plagued by legacy issues such as mountains of bad loans, analysts say.
"The Changshu bank isn't representative of all the rural lenders," said Mr He from ZHY. "The road to a successful restructuring [of rural banks] is long. It may take five years."