11 September, 2012

China Bank Mergers & Acquisitions (Agricultural Bank of China)

An Agricultural Bank of China branch in the town of Chencun (陳村鎮), province of Guangdong (Canton), China.

Agricultural Bank of China (農業銀行, 农业银行)

Agricultural Bank of China (known as “ABC” in China, AgBank outside), along with the Bank of China, China Construction Bank and the Industrial and Commercial Bank of China, are the country’s Big Four state-owned commercial banks. The current Agricultural Bank of China was established only in 1979, though it refers to its earliest founding to 1951, when the People’s Republic of China (the Communist China that was established in 1949) nationalized and consolidated the Farmers Bank of China with the Co-operation Bank to create the Agricultural Co-operation Bank. Merely one year later, however, the Communist government integrated the Agricultural Co-operation Bank into People’s Bank of China, the country’s central bank.

In 1955, the government established the Agricultural Bank of China but it too was merged into the People’s Bank in 1957. The whole process of creating an Agricultural Bank only to integrate it into the People’s Bank repeated once again between 1963 and 1965.

Finally in 1979, under China’s newly-adopted “economic reform and open-door” policy, the Agricultural Bank of China was re-established once more to serve China’s rural communities. The bank’s mandate was to accept deposits as well as to finance agricultural development in China’s vast countryside.

In 1984, the bank obtained its first ever World Bank loan to promote agricultural reform. In 1994, the goal of official economic development in rural China was separated and transferred to a new bank named the Agricultural Development Bank of China (ADBC), which was launched with over CNY 259-billion in agricultural loans (assets) transferred from the Agricultural Bank of China and the Industrial and Commercial Bank of China (ICBC).

For many years, AgBank also held responsibilities of supervising the country’s rural credit co-operatives (RCC), a vast network of credit unions in the countryside. In 1996, however, the People’s Bank of China took over those responsibilities.

Under Communist China’s state-control, bureaucracy and corruption was common in all Chinese banks until the 1990s, when regulatory and managerial reform began to slowly transform them towards more market-driven and risk-conscious enterprises. In 1997, AgBank accelerated the abolishment of its policy-based lending practices. No longer would the bank offer credit based largely on the State Council’s agri-economic policies, rather, it would make lending decisions based on market conditions and expected rate of return like other commercial banks.

However, despite a decade of reforms, AgBank’s multiple billions of non-performing loans remained a major obstacle to the bank’s profitability. While three of the other Big Four state-owned banks floated their shares publicly in Hong Kong and Shanghai between 2005 and 2006, an initial public offering for AgBank had to be delayed until the bank’s capital level was more acceptable.

In late 2007, the Chinese government took over CNY 816-billion (USD $116-billion) of bad loans from AgBank at face value to improve the bank’s capital reserve. Then in October 2008, China’s sovereign investment fund China Investment Corp. further injected CNY 130-billion (USD $19-billion) into the heavily-indebted AgBank. The funding was provided by a CIC subsidiary called Central Huijin Investment Co. Ltd. Following the capital infusion, AgBank became jointly-owned by Central Huijin and the Chinese Ministry of Finance.

In 2009, the bank was formally converted into a joint-stock company with limited liability and adopted the name Agricultural Bank of China Ltd.

Following the multi-year long preparation, in July 2010, various state agencies of the Chinese government floated a 16.3% stake (47.65-billion shares) of the Agricultural Bank of China in Hong Kong and Shanghai that raised HKD $152.5-billion (CNY 127.7-billion, USD $19.23-billion). Between late July and August 2010, the bank was able to sell its overallotment shares in both Hong Kong and Shanghai, raising an additional HKD $12.17-billion (USD $1.57-billion) in Hong Kong and CNY 8.95-billion (USD $1.31-billion) in Shanghai, bringing the total IPO to a new world record of HKD $171.0-billion (CNY 151.2-billion, USD $22.1-billion).

As of 2010, Agricultural Bank’s 24,000 branches, 30,000 ATMs, 440,000 employees served more than 350-million customers.

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