A recent disclosure by MetroCorp Bancshares (MCBI) that it sought Chinese investors before selling to a California company provides more evidence that China could soon exert more influence over the U.S. banking industry.
The $1.6 billion-asset MetroCorp agreed in September to sell itself to East West Bancorp (EWBC) in Pasadena, Calif., for $273 million in cash and stock The companies target Chinese-American communities and are heavily involved in lending to businesses that conduct trade between the United States and China.
East West wasn't MetroCorp's first choice. Before that deal was hammered out, the Houston company courted potential overseas buyers.
In early 2013, the $1.6 billion-asset MetroCorp hired a consultant in China to "identify any Chinese financial institution that was interested in entering the U.S. market through a business combination," MetroCorp said in a Tuesday regulatory filing.
The disclosure was part of a proposed settlement among East West, MetroCorp and a group of disgruntled MetroCorp shareholders.
George Lee, MetroCorp's co-chairman, president and chief executive, did not return calls seeking comment. Emily Wang, East West's marketing director, declined to comment.
Last year, regulators approved the first Chinese bank's investment in a U.S. bank, allowing Industrial and Commercial Bank of China to buy up to 80% of the U.S. operations of Bank of East Asia in New York. China isn't the only country with banks interested in the United States. Latin American banks are increasingly interested in buying U.S. banks to fuel growth.
So it makes sense that MetroCorp sought out Chinese money before embracing a U.S. buyer, says Richard D'Aveni, a business professor at Dartmouth College. "It's only a matter of time before there's a lot more Chinese investments in American banks," he says.
Other industry observers believe interest in Chinese capital will be limited to Asian-American banks.
"I wouldn't expect a mainstream bank to be looking there," says Gary Tenner, an analyst at D.A. Davidson. "That's probably not the first step they would try to take."
Chinese banks are unquestionably interested in the United States, though MetroCorp might not have been a good fit, says Julianna Balicka, an analyst at Keefe, Bruyette & Woods.
In addition, a bank with $1 billion to $2 billion assets could be too small to garner Chinese interest, she says. And MetroCorp might have lacked the technical skills desired by a Chinese bank, Balicka adds.
"Some people say the Chinese-U.S. banks make sense because of the natural Chinese customer base," Balicka says. "Other people say the Chinese banks already have that so they might be interested in non-Chinese-U.S. banks."
The Federal Reserve Board's approval of the Industrial & Commercial Bank's investment raised concerns among government officials. Sen. Robert Casey (D-Pa.) warned that the bank, which partnered with a Chinese sovereign-wealth fund, would attempt to undercut American competitors.
Casey also questioned whether the Fed's approval was related to concessions the United States obtained on foreign ownership of brokerages in China.
As a result, D'Aveni says he is surprised China's interest in U.S. banks hasn't raised more red flags among lawmakers and the overall public.
"I'm very shocked people aren't considering the long-term consequences," D'Aveni adds. "It is one thing when we buy their rubber dolls. It's a different thing when they buy our banks."
The Chinese government could use its ownership of U.S. banks to try to undercut American economic policy, D'Aveni warns. "I just don't see them being fair by American rules," he says.
Chinese investments in American companies have raised hackles in other industries.
When Shuanghui International announced a deal to buy Smithfield Foods, the largest U.S. pork producer, some lawmakers raised concerns about Chinese influence on U.S. food safety. Shuanghui's acquisition closed in September.
Some lawmakers also warned that a potential Lenovo Group acquisition of BlackBerry could raise national-security concerns in the United States and Canada.
Political questions aside, selling to the $24.5 billion-asset East West should help MetroCorp advance its strategy of doing more business in China, even without a direct investment from a Chinese bank.
Before the financial crisis, MetroCorp had opened offices in Xiamen and Chongqing to expand lending in the area of trade finance, where loans are guaranteed by the Export-Import Bank of the United States.
MetroCorp has also used the offices to make more short-term loans to foreign correspondent banks in China. The Chinese offices were key factors in the effort, as they helped form "relationships that we have cultivated for the last two or three years," Lee told analysts during a January conference call.