China Construction Bank Sells 27 Rural Banks

China Construction Bank (CCB), one the big four Chinese state-owned banks, sold 27 rural banks to Bank of China (BOC), making BOC the biggest owner of village banks in the country.

Bank of China, also one of the big four, bought the 27 rural banks for 1.6 billion yuan ($240 million), offering a slight premium on the listing price of 1.57 billion yuan.

In April 2017, BOC bought 15 other rural banks from policy lender China Development Bank for 978 million yuan, nearly 20% less than the seller’s asking price. The deal gave BOC the country’s largest banking network penetrating into the vast rural areas.

Rural banks, with business mainly covering villages or townships, have thrived across China since 2007 as part of Chinese government’s plan to promote financial inclusion. Since then, CCB invested a total of 1.4 billion in creating the 27 rural banks.

But after 10 years of development, the banks’ contribution to the parent’s bottom line was minimal. As of the end of 2017, the 27 rural banks had a total net profit of 281 million yuan, or just a 10th of a percent of the parent bank’s total net profit of 243.6 billion yuan.

While BOC has designated rural banks as its core approach to expanding financial inclusion, CCB has never specified a role for rural banks in its financial inclusion strategy. Instead, CCB has emphasized the use of financial technology for the underserved rural segment.

CCB listed the 27 rural banks on the Beijing Financial Assets Exchange in late June seeking potential bidders. It stipulated that the buyer would have to acquire the 27 banks all together. The seller also set 13 additional buyer requirements, such as total assets of no less than 1 trillion yuan and ownership of at least 20 rural banks as of June 30, 2017. The requirements made BOC the only eligible potential buyer.

In 2011, BOC set up a joint venture with Fullerton Financial Holdings, owned by the Singapore state investment firm Temasek, to establish a network of rural banks in China.

As of the end of 2017, BOC Fullerton had 97 rural banks, including the 15 banks acquired from China Development Bank, with a total net profit of 457 million yuan in 2017.

Rural banks’ profitability could vary significantly. Among the 15 banks bought from China Development Bank, eight had net losses in 2016. Caixin has learned that some profitable rural banks could have an annual return on equity as high as 30%.

BOC Fullerton Chairman Wang Xiaoming told Caixin that the company has patience with the development of rural banks.

“Bank of China doesn’t expect the rural banks to provide an immediate return,” Wang said. He said he expected the acquisition to hurt the parent bank’s financial results, but “the parent is big enough to absorb.”