UCBH Holdings Inc., which caters to Chinese-Americans, is about to become the first U.S. banking company to own a bank outright in China.
The San Francisco company announced Tuesday that it has a deal to buy the $217 million-asset Business Development Bank Ltd. in Shanghai for $205 million in cash.
UCBH has a branch in Hong Kong and representative offices in Shenzhen and Taipei, but the deal for the privately held Business Development Bank would give the $10.4 billion-asset company its first full-service branches in mainland China.
To date only a few large banking companies, such as Citigroup Inc., have bought minority interests in Chinese banks or formed joint partnerships with them.
UCBH "will be the first among its peers to have a full-service banking platform not only in Hong Kong, but also in mainland China, which will enable them to capture more of the trade finance flows between the U.S. and China," said Lana Chan, an analyst at Bank of Montreal's BMO Capital Markets in New York.
Once the China Banking Regulatory Commission approves the landmark deal, Ms. Chan said, UCBH's competitors likely will follow, including the $8 billion-asset Cathay General Bancorp and the $10.8 billion-asset East West Bancorp, two Chinese-American banking companies based in Los Angeles.
Jonathan Downing, UCBH's director of corporate development and investor relations, said the deal would give his company a leg up on its competitors.
"We'd be able to get more customers on both sides of the Pacific Rim, because Chinese manufacturers and American wholesalers could deal with the same bank," Mr. Downing said. Instead of having to transmit letters of credit and other shipping documents from one bank in China to another in the United States, for example, a Chinese manufacturer could just drop off the documents at a UCBH branch, and money from a U.S. wholesaler's account would be transferred automatically, he said.
"The manufacturers would get paid faster, and the wholesalers" who are UCBH customers "would have better relationships with them," Mr. Downing said.
UCBH said it plans to ask Chinese regulators for an expanded license to conduct business in the local currency, Renminbi, with Chinese individuals and businesses. Currently, Business Development Bank's license allows it to use the local currency with only foreign businesses and individuals residing in China. It uses the U.S. dollar to conduct business with Chinese individuals and businesses.
The move by UCBH, the parent company of United Commercial Bank, had been expected for some time. It has been growing to meet Chinese regulators' requirement that foreign companies have at least $10 billion of assets to be eligible for a full banking license. UCBH reached that threshold last quarter.
UCBH would be able to open just one branch a year under Chinese regulations, but Joseph Gladue, an analyst at Cohen & Co. in Philadelphia, said the limitation should not affect its ability to expand its trade finance business.
Analysts said the price is reasonable. Though it appears high for a bank of Business Development's size, the deal works out to 2.7 times book value, because Business Development has $75.9 million of equity, or a 35% equity-to-asset ratio.
The deal is expected to close in the fourth quarter. Business Development would operate as a subsidiary of United Commercial but would have a separate Chinese bank charter.
UCBH said the acquisition would not affect this year's earnings but would be marginally dilutive next year and then accretive in 2009.
