China Merchants Bank (CMB) has said it is not tempted to accelerate its international expansion through acquisitions as it opened a London office recently to broaden its overseas footprint. The opening of a London representative office by China’s sixth-largest lender follows its launch of a New York branch in October and the buyout of Hong Kong’s Wing Lung Bank in a $4.7 billion deal last year.
The UK government is keen to offload its shares in Northern Rock, Royal Bank of Scotland and Lloyds Banking Group, but some see more risks than chances. CMB is constrained by its capital. A 33 percent fall in earnings in the first quarter came as the bank was hindered by a relatively low Tier 1 core capital ratio. At 6.5 percent at the end of March, the ratio met regulator requirements, but was below the 9.5 percent to 10 percent range of big state rivals. Several investment banks had begun formally pitching CMB for mandates to handle the offering, sources had told reporters.
Analysts estimate an issuance of $3bn would lift CMB’s Tier 1 capital ratio to above eight percent and a bigger portion in Shanghai-listed A shares would reduce earning dilution, thanks to a 25 percent premium. CMB shares trade at rich valuations as it is seen as a high growth bank. Even after factoring in the potential issuance, the bank would trade close to three times 2009 book value, roughly 20 percent above its peers, and 16 times 2010 earnings, a 50 percent premium to peers average, analysts said.
