Shanghai, Aug. 20 -- Citigroup Inc. is in talks to buy as much as 8.26 percent of Shanghai Pudong Development Bank Co. for about 1.4 billion yuan ($170 million), a person familiar with the talks said.
The world's biggest finance company, whose Citibank unit has seven outlets in China, may gain seats on the board of a bank with 261 branches, said the person, who asked not to be identified. The city government targets a valuation similar to that used when HSBC Holdings Plc bought a stake in Bank of Shanghai last year, he said.
Citibank spokeswoman Grace Guo declined to comment.
Chinese lenders like Pudong Bank, the biggest financier of Shanghai's Pudong financial district, are seeking allies to become more competitive. Citibank would become the first foreign bank to hold shares in a publicly traded mainland bank, gaining better access to 1.3 billion people and $1 trillion of savings.
"The government may give the deal the green light because it wants to prod domestic banks to improve asset quality and stay competitive," said Qiao Xiaoguang, a banking analyst at Guotai Fund Management Co. in Shanghai.
HSBC's December acquisition of a stake in the unlisted Bank of Shanghai at a 60 percent premium to net asset value was being used as a reference by the owner of the Pudong Bank stake,
Shanghai State-Owned Assets Operation Co., the person said. That translates to about 5 yuan a share, less than a third of the price of the common stock of 18.16 yuan. It hasn't been decided if the whole stake will be sold, the person said.
Pudong's spokesman Yang Guoping on Aug. 15 told Bloomberg in an interview the lender is in talks to sell shares to Citigroup. He declined to comment on details of the talks with Citibank today.
Citigroup Push
Pudong Bank A shares, which only domestic investors can trade, closed 5.3 percent higher at a 12-month high of 18.16 yuan as of 3:00 p.m. on the Shanghai exchange. The Pudong shares which
Citibank may be offered cannot be traded on China's exchanges or sold to other investors without government approval.
Pudong Bank had net assets of 2.97 yuan a share at the end of June. The asset management company wants to sell the whole stake but may keep a small amount of stock, the official familiar with the talks said.
Citigroup, which has had a presence in China since 1902, has four branches, one sub-branch and two representative offices on the mainland.
Pudong Bank was founded in 1993 to help fund the development of Shanghai's Pudong district as China's new financial hub. The bank, which employed 5,743 at 261 branches at the end of last year, has a market value of 41.4 billion yuan.
Bad Loans Avoided
As a small, relatively new bank, Pudong avoided many of the government-mandated policy loans that propped up unprofitable Chinese factories. As at the end of June, 5.4 percent of Pudong's total loans were non-performing.
That's much healthier than bigger rivals such as Industrial & Commercial Bank of China, the country's biggest lender, which classified 27.5 percent of its loans as non-performing in the same period.
"The purchase would bring a reshuffling to the bank's top management," said Zhou Zhenyi, a Shanghai lawyer who owns 7,000 Pudong Bank shares. "If Citibank were to take the helm after becoming the largest shareholder, Pudong Bank may undergo a deep and thorough change."
Citigroup was reported in May to be in talks to buy an undisclosed stake in Bank of Communications, China's fifth-largest lender, China Minsheng Banking Corp., its only privately owned bank, and China Life, the biggest life insurer.
Citigroup would become the biggest shareholder of Pudong were it to buy the entire stake. The city's ownership of Pudong is spread through several investment units. Shanghai International
Trust and Investment Co. owns 6.97 percent, Shanghai Industrial (Group) Co. owns 6.56 percent, Shanghai Jiushi Co. owns 6.35 percent and Shenergy Co. owns 2.07 percent, according to Bloomberg data.
People's Bank of China spokeswoman Chen Jie said she was unaware of Citibank's plan to buy part of Pudong. Shanghai State-Owned Assets Operation declined to comment.
