* ICBC interested in about 20 pct of Cathay Fin- source
* At current market cap, deal would be worth $3.4 billion
* Sign of easing of cross-strait relations
* Companies hope to sign deal soon after free trade pact
* ICBC shares close up 0.6 pct, Cathay ends flat before
(Adds quotes, background, details)
By Faith Hung and Michael Flaherty
TAIPEI/HONG KONG, Dec 2 China's ICBC (1398.HK)
is in talks to buy a stake in Taiwan's Cathay Financial
(2882.TW), sources said on Wednesday, in a potential $3.4
billion deal that would be the first direct investment by a
Chinese bank into a Taiwan financial group.
The talks come amid improving relations between former
enemies China and Taiwan, and a flurry of activity involving
financial groups and investors on both sides of the Taiwan
Any deal between the two companies would face both
financial and political scrutiny, with tensions still lingering
despite a recent China-Taiwan memorandum of understanding for
financial companies that's meant to boost economic and
One source with direct knowledge of the matter said that
ICBC, the world's largest bank with a market capitalisation of
$265 billion, was interested in buying a roughly 20 percent
stake in Cathay Financial, Taiwan's top listed financial
holding group, with a market value of $17.3 billion.
"The two firms have met for five to six times in the past
two months. The talks are getting very serious," said the
Another source confirmed the talks and the potential size
of the deal but said discussions were in their early stages.
ICBC and Cathay Financial declined to comment.
Goldman Sachs (GS.N), Allianz Group (ALVG.DE) and American
Express (AXP.N) all hold stakes in ICBC (601398.SS).
The sources did not want to be identified because they were
not authorised to speak publicly about the deal.
"This will definitely be positive for Cathay Financial
because it gives them a huge advantage if they want to expand
in China," said Michael Lan, an analyst at Fubon Securities.
He added that for now, it will be tough for Chinese banks
to be anything but investors in Taiwan as the Taiwanese banking
market is oversaturated.
But Chinese lenders may still seek to open branches in
Taiwan, a desire that China Construction Bank (601939.SS) spoke
of on Wednesday [ID:nPEK205409].
Once on the brink of war, China-Taiwan trade relations have
thawed since President Ma Ying-jeou took office last year, with
bilateral deals promoting tourism and shipping links already
ICBC and Cathay hope to sign a deal soon after Taiwan and
China sign a free trade pact, which Taiwan aims to sign early
next year, one of the sources said.
Any plan for ICBC to buy into Cathay Financial will likely
catch the attention of pro-independence Taiwan lawmakers who
have already complained about Beijing's economic support to
Taiwan with the goal to eventually unify the island with
ICBC shares closed up 0.6 percent in Hong Kong, while
Cathay shares ended down 0.2 percent in Taipei. The initial
Reuters report about the talks broke after Taiwan's market
"An acquisition makes lots of sense for ICBC and Cathay
Financial," said an analyst at a U.S. brokerage in Taiwan, who
was not authorised to speak publicly about the matter.
"ICBC could own part of Taiwan's biggest financial holding
firm. And Cathay can leverage ICBC's distribution network in
China for its insurance products."
Cathay Financial is the parent of Taiwan's largest insurer.
MORE DEALS TO COME
The talks between ICBC and Cathay are the latest in a
flurry of activity among financial groups in Greater China.
Hong Kong-based Primus Financial Holdings, picked by AIG
(AIG.N) as the buyer for its Taiwan Nan Shan Life unit, said on
Wednesday it intends to resubmit its application to Taiwan
regulators seeking approval for the $2.15 billion deal.
And Fubon Financial (2881.TW), Taiwan's No. 5 financial
conglomerate, is one of a number of parties bidding for Morgan
Stanley's (MS.N) stake in Chinese investment bank CICC, sources
with the direct knowledge of the bid said, a deal that could be
worth more than $1 billion. [ID:nHKG180237]
Cathay Financial Group was established in 2001. The
company's units include life insurance arm, a securities
brokerage, a bank and other financial institutions.
ICBC was founded in 1984 by the Chinese government with the
aim to take over responsibilities from China's central bank to
support state-owned enterprises across the Communist nation.
Roughly five years ago, ICBC was bailed out by the Chinese
government. By 2006, it went public through successful IPO
offerings in Hong Kong and Shanghai, becoming the largest bank
in the world after last year's financial crisis.
ICBC bought a 20 percent stake in South Africa's Standard
Bank (SBKJ.J) for $5.6 billion in cash in 2007, at the time the
largest ever foreign acquisition by a Chinese commercial bank.
(Additional reporting by Baker Li, Kelvin Soh, Lee Chyen Yee
and George Chen; Editing by Jean Yoon)
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