More and more of City National Bank's business customers are doing business in China and have been asking the Los Angeles bank if it could provide banking services there.
Not wanting to say no, but hesitant to go through the bureaucratic hoops of opening a branch overseas, the $14.7 billion-asset City National has struck what it believes is the perfect compromise: a referral agreement with a Hong Kong bank.
City National said this week that it established a partnership with the $30 billion-asset Bank of East Asia to refer customers seeking banking service in China to the Chinese bank. In turn, Bank of East Asia will refer any of its customers doing business in the United States to City National for traditional banking services such as checking accounts, commercial real estate loans, or even wealth management.
These types of deals are not common for U.S. banks, analysts say; most catering to customers with overseas operations prefer to employ bank representatives in foreign countries, mainly to expedite trade activities. It is the first deal of its kind for City National and the first in North America for Bank of East Asia, which has similar partnerships with banks in Korea, Canada, Germany, and India.
"This enables City National to have an 'immediate' solution" to its customers' demands for a complete range of banking services in China, said Russell Goldsmith, the chief executive of the bank and its holding company, City National Corp.
Neither bank will receive fee income from the referrals, but each should benefit from an increase in banking business, said Mark Mayers, a senior vice president at City Bank and the manager of its international banking services, though he would not say by how much.
The arrangement is mainly for customers such as manufacturers that outsource production in China, importers and exporters with overseas operations, and those with investments in Chinese businesses that need services overseas.
Trade between China and the United States is exploding, and so is investment in China by U.S. companies, Mr. Goldsmith said. According to the U.S. State Department, cumulative American investment in China now exceeds $50 billion.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, called the agreement a smart and inexpensive way for City National to give value-added service to its customers.
City National operates predominantly in southern California, focusing on commercial and private banking. Its international trade finance business is small, Mr. Rabatin said. But it is growing - fee income from the business rose 22%, to $6 million, in the first quarter, and the Bank of East Asia deal should attract more international trade customers.
Mr. Rabatin said he does not see City National presenting a serious competitive threat to such Chinese-American companies as the $8 billion-asset UCBH Holdings Inc. in San Francisco, the $6.9 billion-asset Cathay General Bancorp in Los Angeles, and the $9.3 billion-asset East West Bancorp in San Marino, Calif., all of which have much more extensive trade finance operations and have opened overseas representative offices.
In 2004, UCBH went even further and opened a full-service branch in Hong Kong. Sheryl Seapy, a spokeswoman for UCBH, said the branch has accumulated more than $600 million of deposits and has either made or committed to $415 million of loans.
UCBH's China initiative "is going to be very valuable five, 10 years down the road, as opportunities bridging China and the U.S. increase," Mr. Rabatin said. "Any bank that opens branches on both shores is going to win more business, and I think you're going to see more banking companies trying to make that happen."
Joseph K. Morford, an analyst at Royal Bank of Canada's RBC Capital Markets in San Francisco, said it remains to be seen whether City National will generate much business from the referral arrangement. But the agreement could also be viewed as a defensive measure against competition from banks that are more involved in trade finance, he said.
"Why open the door to another bank if you don't have to?" he said.
