SHEER AMBITION: The Bank of China is expanding into Switzerland, a global hub for private banking services

The Bank of China Ltd. (BOC) just got one step closer to expanding its private banking services in other countries.

On July 29, the company said in a news release that its wholly-owned subsidiary, Bank of China (UK) Ltd., had bought a 30-percent stake in the Switzerland's Heritage Fund Management (HFM) SA for CHF 9 million (about 60 million yuan, or $8.78 million). The acquisition marked the bank's debut in the Swiss financial market.

BOC also said bank supervisory bodies in the UK and Switzerland both agreed to the deal. BOC will gradually increase its stake in HFM to 70 percent through new share purchases and will rename the firm Bank of China (Switzerland) Fund Management Co. At present, Jacques Mechelany, HFM's founder, holds the other 70 percent of the company.

Prior to BOC's acquisition, HFM was not well-known on the mainland, but it has always been engaged in investing in Asia, especially in China. HFM was founded in Geneva in 2002, and now manages six funds with assets totaling more than 300 million euros. Three of its six funds are China-related: the Heritage Fund China Absolute Return, the 788 China Fund, and 788 China Smaller Cap Fund.

Mechelany manages the 788 China Fund separately and currently invests 40 percent of its assets in stocks on the mainland A-share market or in other equities-related products. At the end of 2007, the fund had $121 million in total assets, with an annual return of 114.8 percent.

The capital market crisis in the first half of the year dragged down the performances of the HFM funds. At the end of May, the 788 China Fund had lost 48.8 percent of its value since the beginning of the year. But the deterioration of HFM's performance in China did not reduce BOC's interest in the firm.

BOC's spokesman Wang Zhaowen told China Business, a newspaper in Beijing, that the acquisition is expected to bring experienced professionals in fund management and expertise to China's private banking business, which would greatly enhance BOC's overall service quality in the future.

The China Banking Regulatory Commission said BOC (UK) is now preparing to open its private banking business in Switzerland under the renamed company in August. HFM's location in Geneva, a city famous for its private banking industry, would also be conducive for BOC to share market resources and promote private banking services throughout Europe and elsewhere in the world, Wang said.

Only the rich

Private banking provides services to very wealthy individuals and families. Many financial service firms require a person or family to have a certain minimum net worth to qualify for private banking services. Only first-rate commercial banks usually can provide such services.

BOC is the first commercial bank in China to establish private banking services in the country. Last March, it started offering the services in Beijing and Shanghai, tailoring them to the asset management needs of high-end clients with assets of more than $1 million. During the past year, the service has grown quickly and BOC's wealthy clients in Beijing and Shanghai have exceeded 300, according to the bank. Beijing's private banking service alone reached 1 billion yuan ($146 million) in 2007, an amount that would take five years for an ordinary commercial bank subsidiary to accumulate.

Yue Yi, head of the private banking sector at BOC, told Xinhua News Agency that the bank would set up 12 private banking offices in major provinces and municipalities such as Guangdong, Shanghai, Beijing, Jiangsu, Zhejiang and Liaoning. It will also set up three overseas private banking offices in Hong Kong, Macao and Switzerland, he said.

But BOC will encounter some problems with its foray into private banking. Its inexperience in product development and shortage of talented financial professionals restrict its further development of private banking services. Compared with foreign banks, Chinese banks have almost no advantage in mining international resources or in product innovation. Nevertheless, this could give BOC a competitive edge in acquiring a further stake in HFM, Wang said.

Wang said the deal's biggest achievement is that BOC can use HFM's financial platform to develop its own private banking services, even though HFM is in a bit of a predicament with its poor fund returns.

"HFM's business in Switzerland is relatively sound and good," Wang told Xinhua News Agency. "What's more, it has a large number of experienced professionals, mature investment products and superior location" that mean more to BOC than the HFM name itself.

With the acquisition, BOC would aim to increase its private banking business revenue to 8 percent from the current 5 percent, Yue said.