RBS Buys Into Bank of China

The Royal Bank of Scotland has agreed to acquire a 5% stake in Bank of China for $1.6bn (£900m), placating investors' concerns that it might overpay for a foothold in a market many analysts see as risky.

Shares in Europe's second-largest lender rose 27p to £16.34p yesterday after RBS emphasised it had no plans to increase the investment. RBS stock, dogged recently by an "acquisition discount", suffered this month amid market speculation that it would take a 10% stake in the Chinese bank.

RBS is leading an overall investment of $3.1bn in China's second biggest bank, with Merrill Lynch and Li Ka-Shing, the Hong Kong-based telecommunications tycoon, as the co-investors. RBS will control the investment, which is subject to regulatory approval by the Chinese government and amounts to a 10% stake in Bank of China.

The bank underlined the limits of its investment yesterday, emphasising that the deal, which has a three-year lock-in provision, is ringed by warranties and protections.

Chief executive Sir Fred Goodwin said: "There were investor concerns based on rumours about the size of the investment we might be contemplating in China. We have made a very modest investment and made that investment recognising that there are some risks. We saw those risks and we have been able to obtain warranties and other protections from the vendor."

He also brushed off concerns that RBS had become fixated with deal-making since it acquired NatWest five years ago, describing the subsequent acquisition record as "relatively modest".

RBS shareholders will not be tapped for the Bank of China purchase, which was one of their major concerns. The deal will be funded by the sale of the bank's 2% stake in Banco Santander, which raised £900m yesterday.

Described as a strategic partnership, the Bank of China deal includes co-operation with RBS in a number of areas. The Chinese bank, which reported an income of $12.6bn last year, has 11,307 branches through which RBS can sell its products. "We are one of the biggest credit card issuers in the world and China is likely to become one of the biggest markets in that area," added Sir Fred.

RBS is expected to use the wealth management expertise in its boutique subsidiary, Coutts, to design services for Bank of China's affluent customer base. The joint ventures are also subject to regulatory approval, but RBS said there were other, unspecified forms of cooperation that can happen without government go-ahead.

Simon Maughan, an analyst at Dresdner Kleinwort Wasserstein, said the deal would allay the fears of RBS investors. Dresdner had warned that some shareholders were concerned that Sir Fred was a "megalomaniac" obsessed with deal-making. "This deal looks markedly better than the 'megalomaniac' camp thought it would be," he said.

Analysts at Keefe, Bruyette & Woods added that RBS will have no capacity for further deals until the end of next year if it acquires the Bank of China stake. The bank's last major deal was the £6bn acquisition of Ohio-based Charter One, a takeover that was funded by a £2.5bn cash call on investors.

Bank of China is expected to launch an initial public offering next year as the Chinese government continues with its restructuring of the banking sector. The state has invested $60bn in the Bank of China, China Construction Bank and the Industrial and Commercial Bank of China, while encouraging the pursuit of external investors.