Search

 

Cablegate: Citigroup Turning Around Troubled Guangdong Development

VZCZCXYZ0000
RR RUEHWEB

DE RUEHGZ #1267/01 3392315
ZNR UUUUU ZZH
R 052315Z DEC 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6714
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS GUANGZHOU 001267

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PASS USTR

E.O. 12958: N/A
TAGS: EFIN CH
SUBJECT: Citigroup Turning Around Troubled Guangdong Development
Bank

REF: A) SHANGHAI 757, B) GUANGZHOU 850

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE
POSTED ON THE INTERNET.

1. (SBU) Summary: Citigroup has made impressive progress in turning
around Guangdong Development Bank (GDB) in the year since it
invested in the bank and installed new management. GDB predicts a
profit of RMB 1.67 billion (about US$230 million) for 2007 after
sizeable losses a year earlier. However, senior management
described the challenges of changing a culture of lending based on
relationships, working with the bank's Communist Party organization,
and cooperating with investment consortium partners. Citigroup
hopes eventually to raise its stake in GDB to make it a platform for
the group's expansion in China, but it also has other goals in mind
for its investment in GDB. End summary.

Reforming a "Profoundly Troubled" Bank
--------------------------------------

2. (SBU) GDB President Michael Zink described impressive progress in
turning around what had been a "profoundly troubled" bank when he
took the helm one year ago. Zink, a Citigroup employee who was
seconded to GDB after Citigroup led a consortium to purchase an
85-percent stake in the bank, has two years left on his three-year
contract with GDB. He explained to us on November 23 that when the
Chinese government founded GDB, the "Development Bank" part of its
title wasn't just a name. GDB was created to make loans that would
encourage development in Guangdong Province, not necessarily loans
that would earn money for the bank. As a result, the most
challenging job for the new management team, led by a small group of
Citigroup employees, has been changing the culture of awarding loans
based on connections, or "guanxi," and instead creating a more
rigorous risk assessment and management system.

3. (SBU) Zink proudly pointed to several measures of improved
performance at GDB i the last year; most notably, the bank will
show a profit of about RMB 1.67 billion (US$230 million) in 2007
after a loss of more than RMB 600 million the previous year. In
addition, the bank aims to reduce its non-performing loan ratio
below 3.3 percent by the end of the year, down from 6.68 percent
when Citigroup bought its stake. Zink also said the bank had
significantly raised its capital adequacy ratio.

With Friends Like These - The Chairman and the Party
--------------------------------------------- -------

4. (SBU) Working out a modus vivendi with GDB's Communist Party
organization has been a major challenge for the new management team,
according to Zink. To underscore the power of the Party
organization within the bank, Zink speculated that if the Chairman
of the Board of Directors, who also serves as the bank's Party
Secretary, was forced to choose between those two titles, he would

SIPDIS
choose to be Party Secretary. Zink complained of the Party
organization's lack of transparency. In the past, the senior bank
management and Party leadership were identical. Now, a new group of
top managers, including Zink, is excluded from Party deliberations.
He commented that although the management team operated in complete
transparency, the flow of communication between management and the
Party went in just one direction.

5. (SBU) Reaching an understanding on how to handle personnel
decisions was the biggest obstacle in Party-management relations.
Zink surmised that the ability to name appointments was probably the
Party's most jealously guarded power within the bank. However,
management would be left with little real authority if it had no
role in personnel decisions. He explained that after a lot of
back-and-forth on the issue, the two sides had agreed that the Party
would nominate a single candidate for open positions and the senior
management team would have the authority to reject candidates it
deemed unsuitable. There had been some positions that had taken
more than one round of nominations to fill, but Zink believes that
this arrangement is working fairly well.

With Friends Like These - Partners and Competitors
--------------------------------------------- -----

6. (SBU) In addition to working with the Party structure, the team
from Citigroup has faced challenges in working with its investment
consortium partners. Because it is restricted as a foreign
investor, Citigroup owns only 20 percent of GDB. IBM, the other
foreign investor, owns just under 5 percent. The three Chinese

partners, China Life, Citic Trust and State Grid Corporation, each
own about 20 percent. Zink described both IBM and State Grid, an
electric power company, as financial investors with little interest
in playing a management role. He said Citic Trust, as a financial
services firm, had the potential to become a strategic investor but
for now had kept a low profile.

7. (SBU) China Life, on the other hand, has behaved more like a
strategic investor and potential competitor with Citigroup for
control of GDB, according to Zink. He believes that since China
Life's main competitor, Ping An Insurance, bought a controlling
stake in Shenzhen Commercial Bank, China Life has been eager to
enter the banking sector and sees GDB as an important platform. He
commented that some disagreements attributed to "cultural
differences" among the consortium partners were more about
controlling the management of GDB. However, Zink acknowledged that
the decision to market China Life insurance products through GDB
branches and a GDB-China Life co-branded credit card had been
successful.

Playing Nice with the Regulators
--------------------------------

8. (SBU) Zink said that GDB's new management team had been proactive
in working closely with the China Banking Regulatory Commission
(CBRC) about reform and development plans for the bank. GDB has
notified CBRC well in advance of any changes at the bank. After
pushing forward rapidly with reforms in the early stages of the
takeover, Zink and his managers decided to slow down the pace of
change to give CBRC more time to absorb their plans. Zink pointed
out that because of the foreign stake in GDB, CBRC monitors it more
closely than most Chinese banks.

Planning for the Future
-----------------------

9. (SBU) Looking forward, Zink told us that Citigroup hopes it might
eventually be able to raise its stake in GDB and use it as a
platform to extend the group's reach into China's second- and
third-tier cities. However, he explained that even if Citigroup is
not permitted to increase its stake, the investment could still be a
success for the group. To begin with, he believes that changes at
GDB have already substantially raised the value of Citigroup's
investment in the bank. In addition, Zink said the venture was
helping Citigroup achieve more abstract goals: learning more about
China's banking market and demonstrating Citigroup's commitment to
strengthening China's financial system.

GOLDBERG

© Scoop Media

 
 
 
World Headlines

 

UN SDG: UN Appoints Twenty Eminent Thinkers To Shed New Light On The World’s Greatest Challenges

New York, 21 January 2021 – Twenty prominent personalities, globally renowned for their intellectual leadership in economic and social fields, will form the second United Nations High-level Advisory Board (HLAB) on Economic and Social Affairs, the ... More>>

UN: As COVID Deaths Pass Two Million Worldwide, Guterres Warns Against Self-Defeating ‘Vaccinationalism'

With more than two million lives now lost worldwide to COVID-19, the UN Secretary-General appealed on Friday for countries to work together and help each other to end the pandemic and save lives. In a video statement , Secretary-General António Guterres ... More>>

UN: Violent Attempt At US Capitol To ‘overturn’ Election, Shocking And Incendiary

A group of independent UN rights experts released ... More>>

UN: Guterres To Seek Second Five-year Term
António Guterres will be seeking a second five-year term as UN Secretary-General, which would begin in January 2022.... More>>