Takeover talk triggers rally on Hong Kong banks

Shares in Hong Kong’s last independent banks leapt sharply on a wave of takeover speculation after Wing Hang became the second in a month to say it had attracted bid interest.

The four independent banks have relatively large pools of deposits and act as a gateway either into China for international bidders or out of China for mainland financial companies looking for access to foreign markets or foreign funds.

Bank of East Asia, the largest of the independents with a market capitalisation of HK$76.8bn ($9.9bn), and Dah Sing both issued statements to the stock exchange on Tuesday to say they had no explanation for the sudden leap in their stock prices.

Chong Hing, the smallest independent, is already in play after it was approached in August by Yuexiu Group, the investment arm of the southern Chinese city of Guangzhou, and other potential bidders.

“The acquisition theme among Hong Kong mid-cap banks is becoming pronounced,” said Anil Agarwal, analyst at Morgan Stanley. “There are four family banks in HK . . . With bidders approaching the first two, investor focus on this theme is likely to intensify.”

Chong Hing stock is up more than 45 per cent since August 8 when it first said it had been approached by potential bidders and now has a market value of HK$14.2bn. Wing Hang’s share price leapt almost 40 per cent on Tuesday to its highest level in more than two years, giving it a market capitalisation of HK$35.9bn.

Dah Sing was up almost 18 per cent, giving it a market capitalisation of HK$16.7bn. BEA was 5.2 per cent higher on Tuesday.

One local press report named China Life, the insurer, as a potential bidder for Wing Hang. Derek Ovington, regional banks analyst at CLSA, said it did not make sense for any non-bank to buy a small Hong Kong bank, whose main attraction was its deposit base.

Hong Kong banks on average have almost 30 per cent more deposits than they have loans, giving them a strong funding base, although their level of loans is at the highest since 2000, according to Barclays analysts.

About half of their deposits are in Hong Kong dollars, almost one-third in US dollars, 10 per cent in renminbi and almost 10 per cent in other foreign currencies.

Hong Kong is a very important banking system, not just for the region but for Greater China

They have been rapidly increasing their US dollar lending this year, especially into China, which led the local regulator, the Hong Kong Monetary Authority, to warn banks in June about their foreign exposures.

“Hong Kong is a very important banking system, not just for the region but for Greater China,” said Mr Ovington. “It is absolutely about their funding base in Hong Kong and their customer base, which can be in Hong Kong, China or around the region.”

There has long been talk of the last Hong Kong banks as takeover targets. But the very high multiple of more than three times book value paid by China Merchants Bank for Wing Lung in 2008 left owners with expectations that have become increasingly unrealistic, analysts say.

“Wing Hang is trading now at relatively cheap levels compared with the 2007-08 ramp up in stock prices and the very aggressive multiples paid for the last two deals,” said Mr Ovington.

The four banks are trading at between one times book value for Dah Sing to almost two times for Chong Hing.

Other analysts said the Hong Kong market had become much more competitive with the growth of the local arms of Chinese banks such as Bank of China Hong Kong and ICBC International, as well as the takeovers of Wing Lung and Dao Heng before that.

“It is much harder for the smaller, family-run banks to compete,” said one.