Royal Bank of Scotland has announced a major move into China after leading a group of investors in the purchase of a stake in the country's second largest bank for $3.1 billion (£1.7 billion).
The co-investors will take a ten per cent holding in Bank of China in a move that will allow RBS and the bank to team up in a number of business areas.
RBS will provide $1.6 billion (£890 million) towards the deal, giving it a stake of just over five per cent. But it will have control of the full ten per cent stake on behalf of co-investors Merrill Lynch and Li Ka-shing, the Hong Kong-based tycoon who controls Hutchison Whampoa.
RBS will pay for the deal by selling its remaining 2.2 per cent stake in Spanish bank Santander for £900 million and the Edinburgh-based lender said it had no plans to increase its Bank of China holding further.
It follows weeks of speculation that RBS was about to step up its presence in the fast-growing Chinese market.
The limited nature of the investment and its full funding via the Santander stake sale helped boost RBS shares as much as 3.5 per cent. The stock is one of the cheapest in the banking sector, valued at about 8.6 times forecast earnings for 2006 versus an average of around ten for European rivals, largely because of fears it might overpay for an acquisition in China.
The UK's second largest bank already has more than 30 years' experience providing financial services in China, with its operations including financial market branches in
Shanghai and Beijing.
The deal, which is subject to regulatory approval, will give RBS access to Bank of China's 11,307 branches and 14 per cent market share of deposits, while allowing Bank of China to tap RBS's expertise in fields such as risk management, RBS chief executive Fred Goodwin said.
He said the two parties would look at a range of possible ventures, including credit cards. RBS is the one of the world's biggest credit card issuers.
Mr Goodwin said RBS had received "appropriate warranties and protections" that would protect investors from the deal turning sour, but declined to provide further details. "The deal we have announced, from Royal Bank's perspective, is low risk," he insisted.
Analysts said RBS's investment could help Bank of China launch an initial public offering next year, which is expected to raise $3-$4 billion and could give an early return for RBS.
Western banks are rushing to get a foothold in China, which is keen to bring in foreign capital and expertise to a banking sector that boasts $1.5 trillion in personal savings, but is burdened by mountains of bad debt accumulated over decades of state-directed lending.
Bank of China was established in 1912 with a traditional focus on trade-related activities. In 1994, it was converted from a specialised trade bank to a state-owned commercial bank and now has subsidiaries in 27 countries.
RBS chairman Sir George Mathewson said the move was an "important opportunity".
He said: "The combination of Bank of China's brand, distribution and customer base with RBS's product and operational strengths and experience will be powerful in the Chinese market."
RBS does much of its business abroad, with a presence in areas including North America, Australia, Japan, Singapore, Hong Kong, France, Germany, Greece and Italy. Its £5.8 billion acquisition of Charter One Financial last year means it generates around a quarter of its profits from the United States.
This month, RBS posted a 14 per cent rise in half-year profits to £3.69 billion. Shares closed up 27 at 1634p.