Minsheng Banking Corp will buy 9.9 percent of San Francisco-based UCBH Holdings for more than $200 million in the first strategic investment by a mainland Chinese bank in a U.S. bank.
Shares in Minsheng climbed as much as 4.4 percent as investors hoped the deal -- its first major foreign investment -- would eventually give the bank more access to burgeoning trade and investment flows between China and the U.S. West Coast.
The deal may herald a string of strategic investments by cash-flush Chinese financial firms in the United States and the rest of the world in coming months and years -- a prospect which helped to fuel a general surge in Chinese bank shares on Monday.
This may accelerate overseas acquisitions by Chinese banks this year, a source close to the China Banking Regulatory Commission, speaking on condition of anonymity, told Reuters.
He said the regulator had been informed of several similar deals that were expected to be finalized soon.
The United States and northeast and southeast Asia -- particularly Japan, South Korea and Singapore -- are the most attractive areas for Chinese banks because of large pools of ethnic Chinese clients there, the source added.
Nasdaq-listed UCBH owns United Commercial Bank, which focuses on the Chinese community in the United States and U.S. firms with business in China. It had $10.7 billion of assets in June, making it one-tenth the size of Minsheng with assets of $112 billion.
Minsheng, the first private Chinese bank to list on the Shanghai stock market, has an option to raise its stake to 20 percent by the end of June 2009, the companies said.
Exercising the option would make Minsheng the biggest shareholder in UCBH, the official Shanghai Securities News said.
Last month, central bank governor Zhou Xiaochuan urged the country's banks to take stakes in overseas institutions, saying this would support China's foreign investment policy and balance a flood of foreign money entering the country's banking sector.
In August, Industrial & Commercial Bank of China agreed to pay $583 million for 80 percent of Macau's Seng Heng Bank. Last December, it bought 90 percent of PT Bank Halim Indonesia.
Chinese banks are just starting to invest in the banking sectors of other countries, though many are still cautious about it, said Wu Yonggang, an analyst at Guotai Junan Securities. The listed banks have plenty of foreign currency to spend.
In the first stage of its deal, Minsheng would spend between $97 million and $145 million to buy 4.9 percent of UCBH, purchasing around 5.4 million new shares at $17.79 each -- a 3.2 percent discount to UCBH's last market price of $18.37.
That stage is expected to be completed by the end of 2007 and would help to fund UCBH's planned acquisition in China of Business Development Bank, a Shanghai-headquartered institution which serves small and medium-sized enterprises, UCBH said.
In the second phase, due to be completed by the end of next year, Minsheng would pay a further $115 million to $172 million to raise its stake to 9.9 percent through another share placement, a purchase of secondary market shares or both.
Under the deal, which is subject to U.S. and Chinese regulatory approvals, the companies would appoint one director to each other's boards. UCBH was advised by Merrill Lynch.
Minsheng's net profit soared 66 percent from a year earlier to 2.82 billion yuan ($376 million) in the first half of this year, boosted by rapid loan growth as China's economy booms.
It has also been seeking to expand domestically through strategic investments, announcing last month that it had agreed to pay 2.34 billion yuan for a major stake in Shaanxi International Trust & Investment Corp.
Its last closing share price of 15.81 yuan valued it at 39 times analysts' forecasts of its earnings this year, about twice the valuations of foreign banks but below ratios of around 45 times or higher for many Chinese banks.
UCBH trades at around 16 times 2007 earnings, according to Reuters data.