Royal Bank of Scotland Group is leading a $3.1 billion investment in Bank of China that will give Europe's second largest lender control of a 10 per cent stake in China's second biggest bank.
The British bank said it would invest $1.6 billion of the money itself, giving it a stake of just over 5 per cent. But it will have control of the full 10 per cent stake on behalf of co-investors Merrill Lynch and Li Ka-shing, the Hong Kong-based tycoon who controls Hutchison Whampoa.
Royal Bank of Scotland (RBS) shares, which have been hit by fears it might overpay for a deal in China and media reports it could spend up to $5 billion, rallied as much as 3.5 per cent.
Western banks are rushing to get a foothold in China, which is keen to bring in foreign capital and expertise to a banking sector that boasts $1.5 trillion in personal savings, but is burdened by mountains of bad debt accumulated over decades of state-directed lending.
RBS said it would fund the deal by selling its remaining 2.2 per cent shareholding in Spanish bank Santander for 900 million pounds ($1.6 billion).
Britain's second-biggest bank is buying the Bank of China stake from government-run Central Huijin Investment and expects the deal, which is subject to regulatory approval, to close in the fourth quarter and to boost its earnings from 2006.
The deal will give RBS access to Bank of China's 11,307 branches and 14 per cent market share of deposits, while allowing Bank of China to tap RBS's expertise in fields such as risk management, RBS Chief Executive Fred Goodwin told reporters.
He said the two parties would look at a range of possible ventures, including credit cards.
Goodwin said RBS had received "appropriate warranties and protections" that would protect investors from the deal turning sour, but declined to provide further details.