Australian Bank Bows Out of China Shadow Banking

(AFR) — National Australia Bank (NAB) has exited China's shadow banking sector with the $173 million sale of its remaining stake in one of the country's biggest trusts.

The deal, which has not yet been disclosed in Australia, makes it the latest major Australian bank to abandon China, which was once seen as a huge growth opportunity. However, tighter capital requirements in China mean foreign banks are increasingly opting to sell out rather than injecting more funds into the business.

NAB was one of the original players in China's shadow banking sector when it acquired a 20% stake in China Industrial International Trust Limited (CIIT) in 2006. However, foreign banks have struggled to make as much money in China as they originally hoped after Beijing moved to regulate the trust sector, which required them to stump up more capital.

NAB on Thursday confirmed it had sold its remaining 8.42% stake in CIIT after the buyer, Shanghai-listed Xiamen ITG Group, announced the deal in a notice to the stock exchange. It is believed the sale, which is not material to NAB, will release about $173 million or 6 basis points of tier one capital when completed.

"The sale is likely to complete in early 2019 but remains subject to regulatory approvals. The sale is consistent with our plan to focus on our core business supporting customers in Australia and New Zealand," NAB said.

NAB has not disclosed the original purchase price but is believed have paid around $36 million for its 20% stake in 2007. That initial stake was diluted to 16.83%.

NAB sold the first half of its equity interest in CIIT to Fujian Energy Group in June 2016 for 420.8 million yuan ($61 million). The latest deal means it has more than doubled the price it fetched for a similar stake in the company two years earlier.

'It is not an easy market'

While tighter capital controls in Australia mean many of the larger banks are increasingly focused on their home market, analysts said tighter regulation of China's shadow banking sector was making it increasingly unattractive for foreign lenders.

It is believed Commonwealth Bank of Australia has also been looking to exit its asset management joint venture in China with Cinda after being forced to inject more capital into the joint venture.

"What we are seeing is there has definitely been a reassessment and even pull back by global banks in general looking at China. It is not an easy market," said Peter Alexander, managing director of Shanghai market consultants Z-Ben Advisors.

China's trust industry was one of the first industries to be subjected to tougher capital requirements by the banking regulator, which meant NAB was asked by its joint venture partner to inject additional capital into the business. NAB, like other foreign banks, had to make a call whether to keep stumping up additional capital or dilute its stake.

"There is always that argument, we made money on the deal but did you leave money on the table?" Mr Alexander said. The NAB sale was below book value based on Z-Ben Advisors' calculations.

China's trust industry has been scaling back risky lending practices after regulators raised alarm bells last year about their off-balance sheet activities. Macquarie Group sold out of its Chinese trust company in 2015.

Contact editor Yang Ge (geyang@caixin.com)