* Scotiabank expects deal to add to earnings in 2012
* Deal expected to close by December this year
* Guangzhou Bank had been looking to list shares
* Latest foreign lender to buy a stake in Chinese bank (Adds background on other pre-IPO buys)
HONG KONG, Sept 9 (Reuters) - Bank of Nova Scotia said on Friday it will buy a near 20 percent stake in Bank of Guangzhou for about C$719 million ($735 million) to expand its footprint in China, the latest in to invest in a Chinese bank before its IPO.
Scotiabank expects the deal to add to earnings next year and for the deal to close by December this year, it said in a statement on Friday.
"Asia is a region of strategic importance for Scotiabank and enhancing our investment in China supports our long term growth strategy," Scotiabank's president and chief executive, Rick Waugh, said.
Bank of Guangzhou is not publicly listed, but is primarily government owned. It has been looking to list in Shanghai and last year invited bids from foreign investors for a 20 percent stake.
Many other foreign banks own the maximum permissible 20 percent stake in second-tier Chinese lenders. For example, Citigroup owns about 20 percent of Guangdong Development Bank, while ANZ owns 20 percent of Bank of Tianjin and Shanghai Rural Commercial Bank.
The initial wave of foreign banks investing in Chinese lenders began with global names such as Bank of America and Goldman Sachs buying stakes in top players such as ICBC and China Construction Bank before their IPOs.
Since then, many of the foreign banks have begun unwinding their investments, typically for a hefty profit. For example, BofA made an after-tax gain of about $3.3 billion when it sold half of its stake in China Construction Bank in August this year.
"The small-to-medium-sized Chinese banks are probably looking to learn from the business models of these foreign banks," said Liu Qiao, a professor at Peking University's Guanghua School of Management.
"The big foreign banks such as HSBC have already bought stakes in the big Chinese banks, so we may see more happening in the second-tier lenders now."
Scotiabank's move into China is also the latest foray by a Canadian bank into the world's No.2 economy. Rival Bank of Montreal became the first Canadian bank to incorporate in China in November 2010 and has said it wants to focus on wealth management and trade financing.
The 127 foreign banks operating in China saw their overall market share rise to 1.83 percent in 2010 from 1.7 percent in 2009, with total aggregate assets of 1.7 trillion yuan, accounting firm PwC said in a report in June. (Reporting by Kelvin Soh in Hong Kong and Gowri Jayakumar in Bangalore; Editing by Matt Driskill)
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