SHANGHAI (Reuters) – China Development Bank said it had no plan to buy Shenzhen Development Bank (000001.SZ), whose shares rose 10 percent on Monday after local media reported it might be bought by the state-owned bank.
CDB, which lends in line with government policies but is now converting itself into a commercial bank, may buy all or part of SDB, a mid-sized lender based in the southern city of Shenzhen, the Economic Observer news service (www.eeo.com.cn) said.
The story sent Chinese bank stocks higher. CDB issued its statement after the market closed on Monday, saying it had no plan to buy SDB or other banks.
SDB is effectively controlled by U.S. private equity firm Newbridge Capital [NB.UL], making it the only listed Chinese bank controlled by foreigners. As of last June, Newbridge held a stake of 16.76 percent.
SDB shares jumped their 10 percent daily limit to 14.99 yuan on Monday, valuing the bank at about $6.8 billion. Trade in the shares was suspended in the afternoon pending a statement.
An SDB official said trade was expected to resume on Tuesday but declined to comment further. A representative for Newbridge could not be reached for comment.
The Economic Observer quoted one unnamed source as saying CDB and SDB were discussing details of a deal and had presented a proposal to the China Banking Regulatory Commission.
Another unnamed source close to CDB’s executives was quoted as saying: “CDB does intend to buy a deposit-taking institution, but it’s not convenient to reveal which one.”
A source familiar with the situation who declined to be named told Reuters that CDB was studying a number of potential Chinese bank targets, including SDB, for a possible acquisition or strategic investment.
The source said talks with SDB remained at an early stage and no specific financial details had been discussed.
Shares in other small and medium-sized Chinese banks rose sharply as investors speculated some might eventually also be involved in merger discussions, as China’s economic slump encouraged talk of consolidation in the sector. Bank of Nanjing (601009.SS) climbed 7.3 percent to 11.87 yuan.
There was also talk CDB might acquire and inject its assets into SDB to achieve a “back-door” stock market listing while avoiding the complicated process of an initial public offering. This might prompt investors to assign higher values to China’s banking sector in general.
The stock market has been speculating for months Newbridge might soon sell its stake in SDB to book a profit. It bought an initial stake in SDB in 2004 at under 4 yuan per share.
Last November, SDB chairman Frank Newman told Chinese media he believed Newbridge would eventually sell off its holdings in the bank, but he did not provide a timeframe.
“Newbridge is a private equity firm, so selling the Shenzhen Bank stake is just a matter of time,” said Qiu Zhicheng, analyst at Haitong Securities in Shanghai. “But it’s too early to say who the buyer will be. There’s a lot of uncertainty.”
For several years, SDB had a higher bad loan ratio than most other listed Chinese banks. But under guidance from banking regulators it said last month it would bring the ratio below 1 percent, near the levels of its peers, by writing off about 9.4 billion yuan ($1.4 billion) of bad debt at the end of 2008.
Loan provisions and write-offs would slash the bank’s net profit for last year by 77 percent to around 600 million yuan, SDB estimated.
By Samuel Shen
(With additional reporting by Andrew Torchia, George Chen and Pily Zou, editing by Dan Lalor) ($1 = 6.83 yuan)