Regulatory Ping Pong for Ping An's Bank Deal

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The market was skeptical about Ping An Group's chances for a smooth acquisition of a controlling stake in Shenzhen Development Bank (SDB) through its insurance arm, Ping An Life Insurance.

And for good reason. Although it's been about nine months since the signing of a tentative agreement, a lengthy regulatory review process is still under way.

The delay forced Ping An and SDB to respond to market rumors March 1 with a joint statement saying the transaction would require approvals from the China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC) and China Securities Regulatory Commission (CSRC).

The deal signed June 12 by Ping An, SDB and TPG Capital (SDB's U.S.-based shareholder, which is selling its stake) was supposed to close by the end of 2009. SDB later announced a postponement until April 30. Now, a handful of observers fear the worst, while others are urging patience.

"Having reached this stage, how will things end if approval isn't granted?" asked a source close to regulators, in an interview with Caixin.

Actually, Caixin has learned, the State Council consented to the transaction in principle before the Spring Festival in February.

In June 2004, the State Council approved the transfer of state-owned shares in SDB to TPG, and regulatory authorities followed suit. It's unclear whether that process will be repeated for Ping An, but SDB officials are cautiously upbeat.

"The high-level leadership has already given its nod of approval, but we still haven't received official approval documents from the CBRC, CIRC and CSRC," a senior SDB executive told reporters. "So we are still navigating regulatory procedures."

Banking on Success

In anticipation of a positive outcome, SDB has started preparing for a private placement. To streamline the process, sources say SDB plans to release an audited financial report March 19, earlier than in previous years. Afterward, SDB plans to submit documents describing its refinancing plan to CSRC for review, which could take up to two months.

That means the bank might have to wait until late April or May for refinancing through a Ping An deal to address its most pressing need for capital.

Meanwhile, Ping An is anxious for a bank investment, which would mesh with plans to create a financial holding group. Ping An tried but failed to buy Guangdong Development Bank in 2005. Its focus later shifted to SDB.

Ping An would buy no more than 30 percent of SDB in two stages. First, Ping An Insurance would acquire 14.7 to 22.36 percent of the bank through a private placement. Then, before the end of 2010, the insurance firm would acquire from TPG's Asian arm NewBridge Capital a 16.7 percent stake in SDB, paying in cash or H-shares.

But Ping An and SDB officials were surprised when Ping An's qualifications to become the bank's shareholder were called into question by regulators.

That's because Ping An Life posted a 2.1 billion yuan loss in 2008 after its investment in Fortis Group soured. Regulators who ordered Ping An to explain the Fortis debacle, however, learned the insurance firm's parent Ping An Group had fully guaranteed the investment.

CBRC regulations say the agency must review and approve any application to change ownership of more than 5 percent of the shares in a state-owned commercial bank or joint-stock commercial bank. These shareholder eligibility conditions are the same as those for a corporation seeking to buy shares in a joint-stock commercial bank, including a rigid requirement that the buyer must post profits for three consecutive years.

One source close to SDB said CSRC last October agreed to the bank's plan to refinance through Ping An, but "only agreed to the refinancing plan, not a private placement to Ping An."

SDB President Xiao Suining said Ping An Life's 2008 loss was an extraordinary circumstance tied to the global financial crisis, and is not representative of the company's normal operations. Thus, Xiao says, there is room for discussing Ping An's shareholder eligibility with regulatory authorities, and that the company may apply for an exemption.

Others close to Ping An say that while the proposed private placement would involve Ping An Life, Ping An Group – the actual buyer – is profitable.

Another industry source said Ping An's qualifications are not an issue. Of greater importance, the source said, is that Ping An Group already controls a bank – Ping An Bank. Regulators now want to know whether the group's bank and SDB could be integrated in a way that satisfies CBRC.

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