SHANGHAI Bank of Communications' (601328.SS) efforts to buy Shanghai Securities Co would, if successful, underline Beijing's desire to build full-service financial giants and could trigger a wave of similar acquisitions by rival lenders.
China has in recent years allowed its commercial banks to diversify their business into leasing, insurance and fund management, but still bars them from investing in brokerages.
Letting Bank of Communications, known as BoCom, buy mid-sized Shanghai Securities, would change all that.
"BoCom is eager to own a brokerage, the last piece of its jigsaw to form a financial conglomerate," said a source with direct knowledge of BoCom's strategy.
"We're interested in the Shanghai Securities stake, but the proposed purchase needs approval from top regulators, who see the deal as a policy breakthrough," the source said, declining to give details.
A BoCom spokesman was not immediately available for comment.
The China Securities Regulatory Commission declined to comment. The China Banking Regulatory Commission could not be reached immediately for comment. BoCom's planned purchase of the Shanghai Securities' stake need approval from both regulators.
Six companies, including BoCom and China Mobile Ltd (0941.HK) are bidding for a 66.67 percent stake in the mid-sized brokerage, with BoCom emerging as the likely winner, local media have reported.
Based on Shanghai Securities' income and other recent deals, the deal could be worth about 6 billion yuan ($930 million), according to Reuters' estimates.
"Given the structure of local financial institutions in Shanghai, the possibility of BoCom winning the bid is bigger because both BoCom and Shanghai Securities are headquartered in Shanghai," said Chen Xingyu, banking analyst at Phillip Securities in Shanghai.
A successful bid by BoCom, which already owns leasing, insurance and fund management units, would make it China's first commercial lender to control a mainland brokerage and fulfill BoCom's ambition to provide a full range of financial services.
Other banks would likely to follow suit, taking advantage of the policy relaxation to buy lucrative broking firms in the high fragmented industry with more than 100 players.
Currently, China Development Bank, a state policy lender, owns a brokerage unit, while commercial banks, including BoCom, Bank of China (601988.SS) and China Construction Bank (601939.SS) (CCB), are only allowed to set up investment banking subsidiaries overseas.
China separated banks from brokerages and insurers in the mid-1990's to ward off escalating risks. Beijing has since relaxed rules to encourage business diversification to help foster financial conglomerates with enough muscle to take on global rivals such as Bank of America-Merrill Lynch (BAC.N) and JP Morgan Chase & Co (JPM.N).
In 2009, BoCom was the first commercial bank to be granted a license to own an insurance company, and the lender has also set up a leasing unit as well as a fund management venture with Schroders Plc (SDR.L).
Rivals including CCB and Industrial and Commercial Bank of China (601398.SS) have also rushed to set up insurance and fund units in recent years.
Reflecting BoCom's push to broaden its revenue streams, the lender's fee incomes jumped 43 percent from a year earlier during the first quarter, representing 14 percent of total income, company data showed.
"Stock broking is a profitable business. Sentiment-wise, this is a positive if it happens but the impact on BoCom's earnings will be small," said Sheng Nan, banking analyst at UOB Kay Hian in Shanghai.
The Shanghai Securities stake is put up for sale because its state parent Shanghai International Group controls another brokerage, so the group must sell one of the two to comply with regulatory requirements.
In 2010, Shanghai Securities recorded 1.47 billion yuan ($227.4 million) in revenue and 568 million yuan in net profit, official data showed. ($1 = 6.463 yuan)
(Editing by Jacqueline Wong and Lincoln Feast)