UPDATE 2-China's ICBC targets commodity trade via StanBank unit purchase

07/31/2013

* Deal would mark ICBC's first step into commodity trading

* Talks in advanced stages, due diligence complete -source

* Standard Bank continues to sell non-Africa businesses

By David Dolan and Denny Thomas

JOHANNESBURG/HONG KONG, July 31 (Reuters) - Chinese bank ICBC is in advanced talks to buy Standard Bank's markets business in London for more than $500 million, sources said, illustrating a growing appetite in China to trade commodities as well as consume them.

One of the two sources familiar with the matter said the prospective purchase by Industrial and Commercial Bank of China would also include Johannesburg-based Standard Bank's currency and interest rate operations in London as well as raw materials trading including copper and aluminium.

Due diligence had been completed and the deal could be announced within months, added one of the two sources, who declined to be identified as the information is not yet public.

Chinese trading companies are well represented in oil and some other commodities markets.

But while China's massive demand for resources, fuelled by its rapid industrialisation, has underpinned worldwide markets for everything from oil to iron ore, Chinese banks have been relatively slow to embrace commodities trading.

ICBC, China's biggest bank by assets, has lagged behind its rival, Bank of China Ltd, which last year became the first Chinese member of the London Metal Exchange (LME).

"You have 40-plus percent of demand for base metals coming from China these days, that's the centrality of the market, so it makes complete sense for that to be part of the business case for many of the Chinese banks," said Nic Brown, head of commodities research at Natixis in London.

Standard Bank, which is 20 percent owned by ICBC, has been hiving off its operations outside Africa to focus on fast-growing sub-Saharan markets on the continent.

Standard Bank is a prominent member of the LME, the world's biggest marketplace for industrial metals, which itself was acquired by Hong Kong Exchanges and Clearing Limited last year for $2.2 billion.

Events elsewhere are leaving an opening for Chinese banks to move into commodities trading.

After spending billions of dollars building major operations, Wall Street's role in raw materials trading has come under political and regulatory pressure with JP Morgan Chase & Co the latest to explore selling its physical business.

ICBC is being advised by Citigroup and could pay as much as $700 million, one of the sources said.

A spokesman for Standard Bank said in a statement the two lenders were "jointly exploring areas of greater co-operation, including global markets and commodities".

ICBC did not respond to a request for comment while Citigroup also declined to comment.

CHINA'S METALS DEMAND

It was not immediately clear how many people Standard Bank employed in the markets operation in London. It said in November it was looking to cut up to 15 percent of its 900 permanent staff in London to save $100 million.

For ICBC, which had $88 billion in revenue in 2012, the deal represents a chance to gain experience in commodities trading, rather than promising a big earnings boost, analysts said.

"ICBC is one of the world's largest banks, and this little business in London is one of the world's smallest businesses, so it makes no difference at all to ICBC's earnings projections," said James Antos, banking analyst at Mizuho Securities Asia.

It could also be a precursor to further Chinese expansion in the field.

"There's a lot going on in the commodities markets in China, so it doesn't surprise me at all that you've got Chinese financial institutions that are interested in taking a more active role in trading commodities," said Brown of Natixis.

"Who knows, the Chinese may find there's any number of physical commodities businesses up for sale in the not too distant future," he added.

Standard Bank last year finalised the sale of 80 percent of its Argentine business to ICBC. The two banks said in April they had agreed to fund 20 billion rand ($2 billion) of renewable energy projects in South Africa.

Shares of Standard Bank closed more than 1 percent higher. ICBC's shares finished little changed on Wednesday.



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