Marrying late

AgBank StanChart: Standard Chartered pointedly stayed out of the last wave of foreign stake-purchases in Chinese banks. Now the emerging market-focused bank is reportedly planning to take a minority stake in China's Agriculture Bank's potential $20 billion initial public offering.

At first glance, that hardly looks like the best use of capital. To get the benefit of the doubt, StanChart must refrain from vague talk of "strategic value" and explain how buying AgBank shares will deliver shareholder value.

True, StanChart's plans are not quite like the first generation of bank investments, such as Goldman Sachs' purchase of a stake in ICBC, HSBC partnership with Bank of Communications, and Bank of America's investment in Construction Bank of China. Then, China's banks were smaller and the stakes bigger, making it politically tricky to sell later. Now the reverse is true. StanChart's commitment is likely to be less than $500 million, a paltry 0.3 per cent of AgBank's mooted value.

Lessons have also been learned on both sides. Chinese lenders once sold large stakes to foreign banks hoping for lessons on risk management and other banking skills. Some feel disappointed by what they got back. AgBank and StanChart at least have some overlap. StanChart is an expert in trade finance, with links between soft-commodity producers in Asia and Africa. AgBank may be able to open doors for StanChart in lending to Chinese projects overseas.

Still, StanChart needs to explain to shareholders how it plans to turn that into profits for its shareholders. The answer might be winning more clients in China's heartland, or selling more trade finance and hedging products. To get the benefit of the doubt, StanChart should at least be able to reassure investors it will earn back its cost of capital on the investment.

It probably cannot rely on the attractive capital gains its predecessors made. Goldman and HSBC have both made their money back many times over. But it is hard to be as optimistic about future investments in Chinese banks - particularly as the risks of their heavy lending during the crisis grow. Without the prospect of fat paper profits, StanChart must work even harder to convince that buying AgBank shares makes sense.