Tpg Acquires Sdb

1. Introduction

This case described the reason and process of the transaction and told us some background of not only the Shenzhen development but also the TPG Newbridge Capital and also with some underlying problems and thoughts about China’s banking industry. I would like to find the deep reasons of the phenomena shown in the case and try my best to analyze this transaction.

First of all, in order to analyze the transaction properly, I would like to evaluate the performance of the target firm—Shenzhen Development Bank, which was China’s fifteenth largest commercial bank and had a nationwide banking license. Although located in Pearl River Delta, one of China’s most dynamic economic regions, the bank faced urgent challenges just like many other banks in China. Even all of them are governed by the government, under the instructions from the central or local government, granted an enormous amount of policy loans to underperforming state-owned enterprises. This led them to a poor performance compared to the other peer banks on the worldwide.    

Secondly, based on the analysis of the financial performance of SDB, I can probably judge the reasonability of the valuation and the price the Newbridge pays for the 18% stake of SDB. I plan to use several evidence such as the right and the control of the SDB Newbridge gained from the purchase, the expertise management knowledge Newbridge will bring to the SDB and some multiples calculated from the data to try my best to give a estimation of the valuation range of the transaction price Newbridge should pay for the stake.

1. SDB’s Financial Performance  

As I said above, the further analysis and proper valuation must depend on the situation of the bank based on the data from the balance sheet and the income statement. It’s also necessary that comparing between the SDB and other listed and private joint-stock banks considering the benchmark.

1. Asset Quality

From the data on the Exhibit 9, the NPL ratio in 2000A, 2001A and 2002A are 22.7%, 15.3% and 11.6% respectively, the Exhibit 10 shows that the average NPL ratio of mainly listed and private joint-stock banks is 7.3%. It’s obvious that the three years NPL ratios are much higher than the average. Simply based on the data from SDB annual report, we can see that the SDB’ non-performing loans are much more than that of other peer banks, which means that more loans gave by SDB went wrong. In addition, the NPL data provided by SDB may be a little lower than the reality, as under the pressure from the government and CBRC, if the NPL ratio is too high, the severe regulation may be put on SDB. Therefore, the managers of SDB will try their best to make the balance sheet looks more reliable by the regulators and customers. In addition, since the SDB was mismanaged by government officers and encumbered by massive low-quality loans which resulted in high NPLs, an under-capitalized balance sheet, and disappointing profitability. So, in my opinion, the real NPL may be much more than the data provided on the reports.