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Bank of America to deal in cards
(Forbes)
Updated: 2007-04-16 15:12
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Bank of America's $2.5 billion purchase of a 9% stake in China's second-largest bank in 2005 has yielded tremendous financial rewards on the books for the U.S. bank, as CCB shares have doubled since its IPO a year ago. However, it also proved to be costly for Bank of America, as it gave up its own opportunities to expand in China and sold its profitableHong Kongretailbanking operation to CCB at a bargain price.
The two banks have a two-stage business plan, beginning with CCB setting up an independent credit card unit to which BoA would provide consulting services. This would later be spun off as a co-branded joint venture, with CCB holding a 63% stake and BoA the remaining 37%.
"The project has strengthened our partnership with CCB, and simultaneously has made it possible for Bank of America to participate in the future development in this particular market as it adopts a new regulatory regime," Kenneth D. Lewis, Bank of America's chairman andCEO, said in a statement.
Foreign banks have generally sought to partner with strong local players in co-branded ventures to enter China's nascent consumer credit market, whose growth exceeded 100% last year.
This way, "they can gradually get to know the market, get part of the market quickly, and share in the profit," said Lydia Lin, aBeijing-based banking analyst at Fitch Ratings.
Citigroup has tied up withShanghaiPudong Development Bank and HSBC with Bank of Communications.
The country's growing wealth and large population has banks salivating. There are only some 30 million credit card accounts in China compared with roughly 500 million in the U.S., but according to China Daily,China Merchants Bankis the only commercial bank to actually turn a profit on credit cards as of yet.
A large number of Chinese card holders reportedly haven't used their plastic since receiving it.
CCB said it saw a doubling last year in the number of cards it issued, card spending and overdraft balances. It has issued a total of 6.34 million credit cards, half of which came in 2006. With total credit card spending of 40.467 billion yuan ($5.24 billion), CCB claims it has the highest per card spending in China.
It says it's China's second-largest credit card issuer with a 20% market share, though there is no independent third-party organization in China to verify individual market share claims.
On Monday, CCB also reported a 17.78% increase in operating income for full-year 2006 to 151.593 billion yuan ($19.6 billion) and an 18.7% increase in profit before tax to 65.717 billion yuan ($8.5 billion).
However, these figures are less than impressive when translated into earnings per share, which fell to 0.21 yuan ($1 equals 7.72 yuan) from 0.24 yuan for 2005.
CCB was trading down 0.43% at 4.62 Hong Kong dollars (59 cents) midday Monday.
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