BMO Capital Markets eyes China, India growth

BMO Capital Markets is looking to ramp up staffing in China and India, betting its mining and energy expertise and backing of a financially strong parent will give it an edge over investment banking rivals in Asia.

The unit of Bank of Montreal, Canada's No 4 lender, sees China's resource-hungry state-owned enterprises (SOEs) as a key market for its services as a global economic recovery boosts commodity prices, and interest in deals.

"We are actively looking to broaden our footprint in each country, and that will mean dedicating more resources to meet growing client demand," Michael Rayfield, vice-chair at BMO Capital Markets, told Reuters in a round-table interview.

The bank has four offices in China, in Beijing, Guangzhou, Shanghai and Hong Kong. It has one office in India, in Mumbai.

Bank executives said anticipated growth in both markets would see staff and potentially offices added.

Since 2006, when it became the first Canadian bank to open an investment banking representative office in China, BMO has become a active player, advising on six acquisition deals by Chinese companies.

It kicked off its presence acting as part of the syndicate in Bank of China's initial public offering in Hong Kong in 2006. The deal raised $9.7 billion and was the world's largest IPO in six years.

In the last three months it helped two Chinese firms, Deer Consumer Products and SmartHeat Inc, raise over USD 100 million in equity financings on US markets.

The Beijing office was set up mostly to help China's state-owned enterprises in external mergers and acquisitions and IPOs, with a focus on BMO's specialty: advising on metals and mining and energy sector deals.

"That is where most of our success has been," said Egizio Bianchini, the managing director and global head of BMO's metals and mining group.

Executives said there is one SOE client for which BMO is working on three different projects.

Difficult road

China's sometimes bumpy foray into the global game of mergers and acquisitions is relatively recent, and linked directly to its booming growth and ravenous consumption of commodities.

Prosperity saw China change how it obtained commodities, moving from long-term supply contracts to owning the mines that produce the copper, uranium, coal and iron ore it needs.

"They have a very specific mandate that they've been given, which is to secure commodities for their long-term growth and secondly to protect themselves against declining currencies," Bianchini said.

China's SOEs have more than USD 2 trillion worth of reserves, with about three-quarters of that held in the US dollars.

"They know that the US dollar is depreciating over time. They also know that commodities are going to increase in cost over time, so now is a better time for them to make these investments," Rayfield said.

But after coming out like a bull in the middle of the decade, China has become a more cautious and savvy player. Bankers say it learned hard lessons from its failed attempt in 2005 to buy US-based Unocal Oil Company for nearly USD 19 billion.

That bid caused a political uproar, with many US lawmakers calling Unocal a strategic asset that should not fall into foreign hands. Unocal ended up merging with Chevron.

"They would no longer go out and make open-ended hostile bids, and that's when it gave opportunity for folk like us to go in there and talk about how friendly deals could be done," Rayfield said.

"If there is one thing the Chinese do, they learn fast, and when they started losing desirable assets on the world market they rallied," he said.

India, even greater potential?

As impressive as China's growth is, the bankers see equal or greater potential in India, where the middle class is booming, and demanding first-world amenities.

They expect strong post-crisis growth as the nation spends some USD 1.5 trillion on infrastructure development over the next five years. Indian companies are also seen targeting more international acquisitions in 2010.

BMO opened an investment and corporate banking office in Mumbai in 2008, laying the groundwork to be a part of growth in a country that is Canada's second-largest source of immigration after China.

BMO says its investment banking business in India is still in the exploratory stage and that it is carefully looking for the opportunities that suit its talents.

"Fast-forward 25 years, and you can argue that India will be much more important than China, from a metals and mining point of view," said William Butt, executive managing director of global investment and corporate banking for BMO Capital.