By staff reporters Chen Xue, Lu Yanzheng and Fu Yanyan

Related Article: Ping An Celebrates a High-Stakes Bank Deal

(Caijing Magazine) The chairman of China Ping An Insurance Group (SSE: 601318; HKSE: 02318), Ma Mingzhe, has never tried to hide his appetite for a major bank.

Ma, 54, once told Caijing June 16 that "unless there is financial investment value, we will not acquire Shenzhen Development Bank." But then he added, "Of course, strategy is more important than finance."

Ma made his move June 12, when Ping An and Shenzhen Development Bank (SZSE: 000001) jointly announced a share subscription agreement that allows the financial holding company's subsidiary Ping An Life to acquire at least 370 million -- but no more than 586 million -- new shares in the bank.

The announcement, following a week of suspended trading for Ping An stock, will raise at least 6.7 billion yuan, and as much as 10.7 billion yuan, for the Shenzhen bank. Ping An would become the bank's biggest shareholder, with a nearly 30 percent stake.

The agreement also said that, by end of 2010, the Newbridge investment fund in Asia managed by the U.S. private equity firm TPG, would have the option to sell 520 million shares in the bank to Ping An for 11.45 billion yuan, or exchange the stock for 299 million new, Ping An H shares.

Ping An's assets totaled 700 billion yuan at the end of 2008. The company is licensed in China for a variety of services including insurance, banking, trusts, securities, asset management and corporate pension management. It currently operates Ping An Bank.

Taking over the Shenzhen bank and its 500 billion yuan in assets would expand Ping An's opportunities for potential insurance clients, incorporating 80 percent of insurance clients in its banking system, up from the current 15.7 percent. Nevertheless, the firm still faces challenges tied to financial holding regulations.

Negotiations leading to the deal between Ping An, Newbridge and Shenzhen Development Bank stretched over three years. Ma led a team that included Vice Chairman Sun Jianyi and General Manager Louis Cheung.

Ma and Sun have led Ping An since it was established in 2003. Cheung, a Hong Kong native who became a British citizen, is a professional manager with nearly 10 years of experience at Ping An and as a former McKinsey chief consultant for the Ping An account.

After the deal was cinched, these three Ping An executives accepted Caijing's request for an interview in Shenzhen. They described the context and consequences of the deal, as well as how Ping An is mapping its future strategy as a financial holding giant.

Financial Modeling

Caijing: Why do you want Ping An to become a financial holding company, not just an insurer?

Ma: To be precise, China Ping An Insurance Group is not an insurance company, but a financial investment holding company. The group itself does not provide insurance or financial services. Neither does it have an insurance license. All businesses are run and managed by subsidiary companies. The group has subsidiaries including insurance, trust, bank and asset management firms. Each has an independent legal representative, independent capital and independent operation, as well as an independent management team. There is a rigid firewall between each of them.

In 2003, Ping An Insurance Group was approved by the State Council and China Insurance Regulatory Commission. In 2004, the company was approved for a public listing. Our development model can be summarized as group holding structure with separate operations and regulations, but listed as one entity.

A universal operations model is not only popular in the overseas financial sector, but has become a rising trend in China as well. It's a result of customer needs, industry competition, IT and modern technological advances, and well-developed regulatory oversight.

Caijing: Ping An is a top tier insurance provider. What is your outlook for developing the group's banking aspect?

Ma: Our strategy is to become a world class financial group. For now, insurance is still our core business, as it represents 80 percent of the group's business. Banking and asset management account for 10 percent of the group's business. We hope to spend about five years encouraging non-insurance businesses to grow faster. Our goal is to see the insurance and non-insurance businesses contribute 50-50 to the group's profits. Then, we will need another five years to achieve balanced development of three business pillars: insurance, banking and asset management.

Caijing: Shenzhen Development Bank's assets top 500 billion yuan, while Ping An's are 700 billion yuan. Was your acquisition of Shenzhen a big leap forward toward a universal financial model? Is it a breakthrough under the current regulatory framework?

Ma: The control model that Ping An has in place is absolutely within the current regulatory framework. This model has been operating for six years and does not conflict with any regulations.

The universal financial model takes two forms. The first is that banks, insurance, securities and trust companies hold shares in one another. This model demands high standards from regulators, as well as in terms of management abilities and risk control.

The second form is a universal model with a fragmented structure. Under this model, the group does not intervene in business operations but is responsible for investing equity in subsidiaries, as well as providing supervision and management. All subsidiaries follow strict rules by operating separately, as each has an independent legal representative, capital, team and management. Risk spread is prevented because a rigid, clear firewall is in place.

Ping An adopted the second model. This model has the advantage of clear and sound corporate governance, sufficient and complete information disclosure, and transparent management. It not only prevents financial risks and enjoys transparency, but also is recognized and acknowledged by governments, regulators and capital markets internationally. It's usually the universal model recommended by international financial regulators.

Can Insurance Do Banking?

Caijing: Why do you have confidence in running a bank, since Ping An started with insurance?

Cheung: Here I perceive a misunderstanding. We will not operate our banking business through our insurance operations. First of all, the group does not intervene in detailed financial operations. Secondly, Ping An has had a banking business for six years. We have done three things: Over all else, we built a management team that consists of world class banking experts and competent local bankers coming from Citibank, China Merchants, CITIC Bank, and Pudong Development Bank. We improved corporate governance. In addition, we established a system and platform.

We have successfully merged Fujian Asia Bank and Shenzhen Commercial Bank, through which we gained valuable experience with mergers and in running a bank business. In addition, the group's banking sector can take advantage of a rich insurance client database, which includes about 40 million individual clients and 2 million corporate clients, as well as more than 3,000 institutional networks. Importantly, the average age of these 40 million individual clients is below 40, which represents a powerful potential consumer group for financial services.

One thing to be added is that Ping An set up a back-office assistance center in Shanghai's Zhangjiang district. It took us nearly 10 years to make the center happen. We introduced back-office facilities from HSBC and localized them to form an advanced system. By using this back-office system, we can separate the management of front and back offices in a most advanced and efficient fashion. This is helpful to risk management when running a bank business.

Caijing: The next foreseeable step would be to merge Ping An Bank and Shenzhen Development Bank. What is your future integration plan?

Sun: China's financial industry has a promising future and great potential. Shenzhen Development and Ping An banks account for a small market share, and so each has a lot of room to grow. After Ping An invested in Shenzhen Development Bank, Ping An Bank and Shenzhen Development Bank are still two banks with separate operations and management. Their market positions are based on standards for listed companies. Ping An can allow Shenzhen Development to share client and network resources with Ping An Insurance in areas that Ping An Bank does not reach. Therefore, the two banks are competing in a positive, interactive and win-win fashion.

At the current stage, we will concentrate on ensuring that all terms of the deal will be implemented. While we complete the two-stage deal, we want to make sure Shenzhen Development and Ping An banks sustain their original growth objectives. The management and staff members at Shenzhen Development are very competent. We have high expectations for future growth, and will give it our best support. In the future, we will discuss all possible means of cooperation based on the principles of maximizing shareholder value, benefiting clients, mutual growth and sharing resources.

Capital Adequacy
 
Caijing: This investment includes a share exchange arrangement between Ping An and Newbridge. But Ping An did not set a lockup period for Newbridge's holding of H shares. Will this create risks for Ping An's H shares?

Cheung: The current deal was designed according to international standards. If Newbridge chooses to exchange shares, Ping An will give 299 million shares to Newbridge, regardless of whether our stock value is higher or lower. As the amount of shares is certain, risks are locked.
 
Within the agreed time frame, if Newbridge asks for cash payment, Ping An will have no problem securing the money by using our internal resources. If Newbridge chooses stock, with no need to pay cash, our capital adequacy will be stronger.

Overall, Newbridge is optimistic about Ping An's future, as it has chosen to be our shareholder and have a share in our future value growth. This also shows its confidence in the Chinese insurance industry and the financial sector at large. We have great confidence in the future of Ping An. We do not worry about any shareholders selling our stock. Some strategic investors from the Middle East and Europe have come to us for dialogue, hoping to become our strategic investors. From the perspective of China's insurance industry's growth potential, we believe Chinese investors will use reasonable judgment in setting Ping An's value.

Caijing: To what extent does this deal risk your capital adequacy?

Cheung: Capital for this deal can be provided through our internal resources. The group has disposable cash of around 24 billion yuan, and can meet solvency standards for our subsidiaries. Even if Newbridge chooses cash, it would be no more than 11.45 billion yuan. Meanwhile, the group and its subsidiaries have strong capital adequacy and solvency to meet all regulatory standards. The group still holds sufficient capital to support rapid growth in the future.

If Newbridge chooses to exchange shares, the capital will be held to support our future business development. Therefore, we think this deal has controllable risk, brings substantial financial value to our future growth, and adds remarkable strategic value.

Caijing: Would it be too radical to make a big acquisition as you just encountered with the failed investment in Fortis?

Sun: These are two separate cases. They are completely different in terms of nature, objective, market and environment. We certainly learned a good lesson from the Fortis case. But we should not be "once bitten, twice shy."

Our investment in Fortis indicated our first step toward globalized asset allocation, as we tried to get away from fluctuating market risks that result from investing in a single economic entity and single capital market. We once obtained a 6.36 percent dividend for our investment. As the current financial crisis is global and systematic, Fortis simply cannot get away from it.

Last year, we made sufficient write-downs for our investment in Fortis. Now, Ping An has overcome all the financial woes and is ready to move forward.

This time, we invested in something on our domestic market. The Chinese financial industry has been the least affected in this global financial storm. And China is the first country to get out of the crisis. All macroeconomic data indicate our economic outlook is turning positive. In areas that I'm familiar with, the risks are controllable.

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