CBA restrained on China

Commonwealth Bank announced a 50% increase in net profit for the six months to 31 December, setting a high hurdle for other major Australian banks to clear this reporting season. But the bank was guarded when questioned about its 11% shareholding in Jinan City Commercial Bank.

"We want growth in China and Jinan wants development of people and systems, including risk management systems we have found with Jinan a mutual recognition of need," said CBA's chief executive David Murray, during a press conference in Sydney on Thursday last week.

The press conference was held to announce the bank's interim results. CBA reported profit after tax of A$1.86 billion, a 50% increase on the corresponding period. Earnings per share on a cash basis were up 40% to A$1.33 and the bank declared another record dividend of 85 cents fully franked. Much of the success has been attributed to the implementation of 'Which new Bank' - an institution-wide restructuring program.

But the mention of China was conspicuously absent from the interim report and accompanying press releases, with Murray being drawn on the topic during a media conference.

"The Chinese banking industry does not need us for growth in terms of investment but we have got a huge amount to add on skill in many areas, so part of that investment was setting up of an exchange program for learning," said Murray.

He said CBA did not pretend to understand the Chinese culture fully and was using the investment to learn more about the country. "China is one of the most important countries in which we should expand," he said.

Murray said he hoped that by sharing skills with Jinan, the bank would develop the know-how to be able to grow outside of its "current geographical boundaries". "Our hope is that the skill transfer that we share will allow Jinan to expand in other areas subject to the approval of the regulator," he said.

CBA bought an 11% share in Shandong Province's city commercial bank for a mere A$17 million in November last year. The strategic co-operation agreement also gives CBA options over additional equity up to 20% - the maximum allowable by regulation for a single foreign investor.

Questioned why the November acquisition had not been covered in the interim report, spokesperson Bryan Fitzgerald told FinanceAsia that Thursday's announcement was a profit result, not a strategic statement. "The reason Jinan wasn't mentioned was because it hasn't impacted on our profits yet," said Fitzgerald.

Aussie banks are understandably wary about beating a drum over offshore acquisitions, particularly in emerging markets like China. The path to offshore expansion for the country's domestic banks is littered with train wrecks, including several billion dollars lost by NAB in markets like the UK and the US.

ANZ has been burnt in Asia, selling Grindlays to Standard Chartered in 2000 after clocking up some hefty losses, and backing out of a deal with Thai Military Bank in 2003 after several months of fruitless negotiation. Though the bank is still pursuing an Asian strategy and in November last year signed an agreement to establish a joint venture bank in Camboida.

CBA itself has a patchy track record in Asia. The bank has a controlling interest in PT Bank Commonwealth in Indonesia (formerly BII) which performs well and also manages several billion dollars in Asia-sourced funds through its subsidiary Colonial First State. Separately CommServe, a CBA subsidiary, handles the administration of a fair chunk of MPF assets in Hong Kong.

But in Japan, CBA relinquished its securities licence in 2002 because it was unable to make money in that county.

Shareholders have traditionally punished Australia's banks for taking gambles in what they consider to be risky markets. The main reason ANZ backed out of its deal with Thai Military was because investors questioned the move.

Murray at CBA is cautiously optimistic that his investment in Jinan will eventually pay dividends, but meantime he is diverting the spotlight to the bank's stellar profit results - a story that every shareholder wants to hear.