The world’s most profitable bank, China’s Industrial and Commercial Bank of China, plans to begin making loans in excess of $100 million to US commercial real estate owners. The ICBC, as it is known, earned pre-tax profit of $24.5 billion in 2009, topping the list of profit-making banks compiled the ‘The Banker” magazine.
Some US lenders, such as Goldman Sachs Group Inc. (NYSE:GS), Bank of America Corp. (NYSE:BAC), and Wells Fargo & Co. (NYSE:WFC) have also indicated that they are interested in returning to the commercial real estate loan business.
ICBC is controlled by the Chinese government, which owns 70% of the bank’s equity, and the country’s regulators are pushing the bank, and other financial institutions, to expand activities to foreign shores. The Chinese are preparing to make a huge bet that US property values have fallen far enough to limit the risk on new lending.
They could be right. The Wall Street Journal notes that more than $1 trillion of commercial real-estate lending will mature in the next five years and that that debt will need to be refinanced. US financial institutions are wary of the commercial real estate market because it concentrates risk in a relatively small number of very large loans.
ICBC plans to limit its risk by financing operations that show positive cash flow and that are run by experienced and successful managers. The bank will also limit lending to 65% of the property’s value.
The bank also plans to hold the loans on its own books, declining the widespread practice among US banks of securitizing loans and then spreading the risk among other investors.
ICBC made its first commercial property loan earlier this month, putting up $150 million into a $355 million loan to a group led by private-equity firm the Carlyle Group. Wells Fargo was the other lender involved in that transaction, a refinancing for a $325 million mortgage on a Manhattan office/retail tower.
When the Chinese government offered 30% of ICBC in an IPO in 2006, the bank garnered nearly $22 billion in the world’s largest-ever IPO. The government hopes to break that record when the Agricultural Bank of China completes its IPO in mid-July.
China’s entry into the US commercial real-estate market differs from earlier foreign shots at US real estate because it comes at a time when the market is at a low point. When Japanese investors hit the US market in the late 1980s, real-estate values were at a then-high, and the investors took a ferocious beating when land values fell in the early 1990s.
ICBC is betting that the worst is over in US commercial real estate. By the mere fact of the bank’s entry into the market, that bet could prove to be right.
Paul Ausick
Top Gaining Stocks
Top Losing Stocks