Big lenders set sights on HK family banks

08:24, October 30, 2009      

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Hong Kong's publicly traded family-run banks are "very likely" to be bought by larger competitors as the cost of operating in the city rises, said a senior banker at the local unit of the mainland's biggest lender - Industrial and Commercial Bank of China (ICBC).

The companies are attractive to cash-rich mainland lenders seeking a platform for expansion in Asia, and to overseas banks aiming to push into the mainland, said Stanley Wong, deputy general manager of ICBC Asia Ltd. He declined to say whether his bank's parent is in talks to buy a Hong Kong lender.

"The fixed cost in running a bank in Hong Kong has become very high regardless of size," said Wong, who headed Standard Chartered Plc's China unit before joining ICBC in 2004. "A lot of these smaller family-run banks are thinking of selling out. They're waiting for the right price."

Family banks including Wing Hang Bank Ltd and Chong Hing Bank Ltd saw costs increase last year even as revenue dropped, squeezing profits. Wing Hang, run by the family of Chairman Patrick Fung, said last month it had received "informal and unsolicited" approaches, a year after China Merchants Bank Ltd beat ICBC to acquire Hong Kong's Wing Lung Bank Ltd.

Fewer bargains

The number of listed family-run banks in Hong Kong, which serves as a hub for goods traveling to and from the mainland, has been reduced to four from six a decade ago as Wing Lung and Asia Financial Holding Ltd's banking unit were acquired. The remaining ones - Wing Hang, Chong Hing, Dah Sing Banking Group Ltd and Bank of East Asia Ltd - have a combined market value of $12 billion, compared with $253 billion for ICBC.

Beijing-based ICBC owns 70.2 percent of ICBC Asia.

Wing Hang's cost to income ratio jumped to 53.4 percent in the first half from 38.8 percent a year earlier, while Chong Hing's rose 4.9 percentage points to 57.35 percent, according to their earnings statements. The ratio at Hang Seng Bank Ltd, controlled by HSBC Holdings Plc, was 30.4 percent.

ICBC, the world's most profitable bank last year, is the mainland lender showing the most interest in acquiring Wing Hang, two bankers scouting for buyers for the lender said in September, declining to be identified.

This year's stock market rally has made it tougher to negotiate a takeover as sellers are likely to demand higher prices, Wong said. The Hang Seng Finance Index, which tracks the performance of 11 banks traded in Hong Kong, has gained 56 percent this year and last week reached a 14-month high.

"Right now, both sellers and buyers are back on an equal footing," said Wong. "Whereas a few months ago it would have been much easier for buyers to find a good bargain."

Finance center

Bank shares fell yesterday amid a global decline in equities. Bank of East Asia dropped 2.5 percent to HK$27.3. Wing Hang lost 1.6 percent to HK$75.15, while Dah Sing fell 2 percent to HK$10.56. The three lenders have advanced at least 69 percent in Hong Kong trading this year.

Last year, when ICBC was competing for Wing Lung Bank, the China Banking Regulatory Commission barred the lender from paying more than three times book value, people familiar with the matter said at the time. China Merchants Bank eventually paid 3.1 times book value, making it the most expensive bank acquisition in Hong Kong in seven years.

Norman Chan, head of Hong Kong Monetary Authority, said last month he wants to consolidate the city's role as an international finance center and expand the city's role in helping promote the yuan's use for commerce and investment abroad.

His comments came after the central government sold yuan-denominated bonds for the first time in the city, tapping the 56.7 billion yuan in yuan deposits at Hong Kong banks. The city is also taking part in a trial program allowing the currency's use in trade settlement with the mainland.

China Construction Bank Corp, the nation's second-largest, in December 2006 bought Bank of America Corp's Hong Kong and Macao unit for HK$9.7 billion, at the time the biggest acquisition by a mainland bank outside the home market.

ICBC in 2000 paid HK$1.8 billion for control of Union Bank of Hong Kong and renamed it ICBC (Asia) Ltd. Four years later, it completed the purchase of Fortis Bank's unit in the city for HK$2.53 billion.

Source:China Daily
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