Dalian City Commercial Bank (DCCB), looking to increase its capital in the face of competition, may soon join forces with Canada-based Scotiabank or National Australia Bank, a DCCB manager told China Daily.

"We've talked with several foreign investors for two years but are more interested in Scotiabank and National Australia Bank," Liu Weizhi, manager of the strategic development department of DCCB, said yesterday.

"After we increased our registered capital from 1.35 billion yuan (US$167 million) to 2.01 billion (US$248 million) in 2005, bringing in a foreign investor turns out to be the highlight of this year," said Liu, who estimates the negotiations will be worked out by the end of the year.

Based in northeast China's Liaoning Province, DCCB's capital adequacy ration reached 4.72 percent at the end of last year but still lagged behind the industry watchdog's baseline adequacy ratio of 8 percent.

As foreign investors accelerate forward into the Chinese market, many are looking at smaller local lenders as possible merger and acquisition targets.

However, Chinese city commercial banks are also stepping up efforts to bring in foreign strategic investors as the China Banking Regulatory Commission (CBRC), the banking watchdog, has asked them to increase capital adequacy ratio to 8 percent by the end of 2006 when the country's financial market opens fully to foreign players as part of its WTO (World Trade Organization) commitment.

With less than a year before the CBRC deadline, many of China's 113 city commercial banks may be unable to reach this target and about 30 may be closed, said Jonathan Anderson, head of UBS Asia Pacific Economics.

To survive, some city commercial banks in Beijng, Nanjing, Ji'nan and Hangzhou have teamed up with strategic foreign investors.

Others, like city commercial banks in Anhui, Shangxi and Jiangsu provinces, resorted to restructuring to enhance their competitiveness.

After boosting its capital and bringing in foreign investors, DCCB is thinking about floating its shares on bourses, Liu said, and its sights are set on European or American lenders.

"We believe quality banks from those areas, whose practices are more integrated with the international practice, will be more helpful in improving our corporate governance," said Liu. "Our major requirement is that the bank or financial group should excel in retailing banking business."

Liu said it is not necessary for the foreign investor to be large, but it should be adept at the commercial banking business.

"We are quite satisfied with Scotiabank and National Australia Bank, with both of them having a sound assets structure and favourable returns on investment," Liu added.

He also confirmed that DCCB would bring in only one foreign lender as the strategic investor, owning a 19.9 percent stake in DCCB.

"We may also take in some financial investors, but the number may be around two to three." Liu said.

Individual banking, risk management and products development will be the focus of the cooperation, according to Liu.

"Under the current supervisory framework, we are not allowed to run banking, insurance and security business together. Therefore, it is impossible to make the intermediate business as our major profit source since we can not share the customers," Liu explained.

"But we can make in-roads into individual banking, where potential risks are much lower than corporate banking."

(China Daily January 17, 2006)