HONG KONG: The Hong Kong listed mainland bank ICBC is in talks to buy a stake in Cathay Financial in Taiwan, sources said yesterday, in a potential $3.4 billion deal that would be the first direct investment by a mainland bank in a Taiwan financial group.

The talks come amid improving relations between the mainland and Taiwan, and a flurry of activity involving financial groups and investors on both sides of the Taiwan Straits.

Any deal between the two companies would face both financial and political scrutiny, with tensions still lingering despite a recent mainland-Taiwan memorandum of understanding for financial companies that's meant to boost economic and political ties.

One source with direct knowledge of the matter said that ICBC, the world's largest bank with a market capitalization of $265 billion, was interested in buying a roughly 20 percent stake in Cathay Financial, Taiwan's top listed financial holding group, with a market value of $17.3 billion.

"The two firms have met for five to six times in the past two months. The talks are getting very serious," said the source.

Another source confirmed the talks and the potential size of the deal but said discussions were in their early stages. ICBC and Cathay Financial declined to comment.

The sources did not want to be identified because they were not authorized to speak publicly about the deal.

"This will definitely be positive for Cathay Financial because it gives them a huge advantage if they want to expand in China," said Michael Lan, an analyst at Fubon Securities.

He added that for now, it will be tough for mainland banks to be anything but investors in Taiwan as the Taiwanese banking market is oversaturated.

ICBC and Cathay hope to sign a deal soon after Taiwan and the mainland sign a free trade pact, which Taiwan aims to sign early next year, one of the sources said.

"An acquisition makes lots of sense for ICBC and Cathay Financial," said an analyst at a US brokerage in Taiwan, who was not authorized to speak publicly about the matter.

"ICBC could own part of Taiwan's biggest financial holding firm. And Cathay can leverage ICBC's distribution network on the mainland for its insurance products." Cathay Financial is the parent of Taiwan's largest insurer.

Reuters

(HK Edition 12/03/2009 page4)