The American who turned a Chinese bank around: Wei Gu

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG (Reuters) - As a former deputy secretary of the U.S. Treasury, Frank Newman is an unlikely choice as chairman of a Chinese bank, but then Shenzhen Development Bank is no ordinary Chinese bank. Its stock symbol (000001.SZ) tells you that it was the first company to go public on the Shenzhen stock exchange. Moreover, the bank is China's first and only foreign investor-controlled listed lender.

SDB is back in the spotlight because its investor -- U.S. private equity giant TPG Capital which owns a stake via its Newbridge Capital fund -- has agreed to sell its holding to Ping An Insurance (2318.HK) (601318.SS), also headquartered in Shenzhen.

Newman, a tall, courteous 67-year old, is credited with turning the bank around, boosting net profit by 12 times and slashing the ratio of non-performing loans by more than 90 percent in the past five years.

We spoke a day after the Chinese stock market tumbled 5 percent on worries that Beijing might rein in China's rapid credit growth.

"Throughout the entire history of banking, every time there was rapid loan growth, you really have to be careful -- very often there are problems after that," Newman said.

"Bankers have very poor memories. Typically the next time they would say, this time it is different. Then they get into similar trouble again."

"Maybe this is different," he mused, but then again it's a hunch he is not prepared to back with SDB's money.

The bank has largely sat out the lending binge. The majority of lending is by the big, state-owned banks which have government backing, so they can absorb the loss if something goes wrong, he said.

SDB has increased profits sharply despite relatively modest loan growth. During the first quarter, its loans grew 13 percent, half of the speed of the industry average, but its net profit rose 12 percent, the highest among the 14 listed Chinese companies. The others saw profits fall by 7 percent on average.

"This bank has already been through a period when the NPLs (non-performing loans) were very high and it was painful. We don't want to get there again," he said.

When he first arrived in 2005, SDB's NPLs were more than 11 percent of assets. What struck him most was how decentralized the bank was. As the Chinese saying goes, the mountain was high and the emperor was far away.

This gave branch managers a huge amount of power that they did not always use wisely. Not only was there little risk management, but branches would sometimes even develop their own versions of the bank's products.

One of Newman's most important reforms was to hire a new credit officer to vet every loan. At first the branches were suspicious, fearing a central official could sour their relations with customers by refusing loans. Six months later, when branch employees saw bank lending growing, they became more accepting of the new regime.

PING AN INVESTMENT WELL RECEIVED

Newman does not speak Chinese, so has to use a translator. But he doesn't see that as an impediment. He argues that the biggest misunderstandings in business come about not because people don't share a common language (indeed the need for an interpreter can make people listen harder) but because they mistakenly think they are on the same wavelength.

The two issues that investors ask most about are Ping An Insurance's (2318.HK) (601318.SS) investment in SDB and his retirement. Ping An has agreed to buy out Newbridge's 18 percent stake in SDB for 11.45 billion yuan ($1.68 billion), almost 11 times the price Newbridge paid in 2004. Ping An is also paying up to 10.7 billion yuan for SDB shares in a private placement, leaving it with a stake of as much as 30 percent.

The acquisition has been well-received in China, as SDB got an investor planning for the long term, Ping An fulfilled its ambition to become a financial conglomerate and Newbridge made a handsome return by installing a good management team who turned around the formerly debt-ridden bank.

Newman thinks SDB has a lot to gain from the deal. Ping An brings capital needed for further branch expansion and its 300,000 insurance salesmen can help attract new business such as credit cards.

But what does the deal mean for him personally?

Newman was put in by Newbridge, who are selling out to a Chinese controlling shareholder. Ping An has a banking subsidiary that is also run by an American, but it only operates in seven cities, while SDB has 300 branches in 18 cities. As banking licences are not easy to get in China, it is far from certain that Ping An would combine those two operations and give up one license.

Newman expects to stay on and certainly has no plans to step back or retire. He lives with his wife in Hong Kong and crosses the border everyday to work.

"I'm doing fine, I'm having fun, and I think I'm still contributing. At some point I have to retire and go back to the U.S., but I hope to have ongoing contact with China."

China has said it wants to let the market play a bigger role in deciding exchange and lending rates, but Newman, having overseen the clean-up of the savings and loan mess at the U.S. Treasury, does not think it's a good idea.

It may seem odd to hear an American banker (and a former Bankers Trust New York Corp. chairman) -- one of the cadre of foreigners brought in to "marketise" China's banking system -- advise against using the market system.

But as he said: "I put myself in the shoes of Chinese policy makers and say, so they want us to put the value of our currency in the hands of young traders, who don't really understand anything, and who have proved in the past two years that they do not understand how to value any financial instruments, is that crazy?"

-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund --

(Editing by David Evans)