Banking: Niche groups offer entrée to mainland

Listen to this article

00:00
00:00

The four remaining independent banks in Hong Kong are pretty small, yet every now and then, they generate a storm of international interest.

Now is one of those times.

It is not their size that matters, but that there are only a handful.

A Hong Kong banking licence is not an easy thing to come by and, more importantly, the city offers a bridge between China and the rest of the world’s financial markets that is attractive to institutions both on and away from the mainland.

“Clearly, there is going to be demand for and interest in these banks,” says Paul McSheaffrey, head of banking at KPMG in Hong Kong. “They are the obvious target for Chinese and foreign players – it really comes down to price.”

Between them, the four had outstanding loans of HK$655bn ($84bn) to customers on the island at the end of 2012. This is about two-thirds of the loans on the books of Bank of China’s Hong Kong branch alone and slightly more than one-quarter of those made by HSBC, according to KPMG.

What is more, most of those loans come from just one of the four independents, Bank of East Asia (BEA), the other three account for just HK$250bn.

The very smallest of the independents, Chong Hing, looks set to be sold to Yue Xiu Group, the investment arm of the Guangzhou local government, after its controlling family shareholders agreed to sell their majority stake.

Wing Hang, the second largest by assets after BEA, told investors in the summer that it had been approached about selling their stake.

ANZ of Australia and OCBC and UOB of Singapore are among those reported to be interested.

Lastly, the family that controls Dah Sing has also said it would be happy to sell at the right price.

Only BEA, run by Sir David Li, seems determined to continue to stay independent – and has strong backing from three big foreign shareholders, Caixabank of Spain, Guoco Management, part of the Malaysian Hong Leong empire, and Sumitomo of Japan.

BEA is better positioned than the others, not just because it is much larger, but more importantly because it has spent more than a decade building a branch network in mainland China.

These attributes make it both more attractive as a target and more able to stand on its own feet.

DBS of Singapore bought Dao Heng in Hong Kong in 2001 – for more than three-times book value – to try and make more headway in China. But, more than a decade later, it still makes only the tiniest sliver of its profits from mainland business, according to analysts at CLSA.

This deal remains a warning for foreign bidders hoping to use Hong Kong as a springboard into China.

The last deal for a Hong Kong bank was the take­over of Wing Lung by China Merchants Bank, also for more than three times book value, which has similarly not made much headway in expanding its mainland business.

However, Wing Lung has managed to increase its offshore lending to Chinese companies sharply, which is perhaps the more important factor.

Chinese companies have increasingly come to Hong Kong for loans since the end of China’s multi-trillion-dollar bank-led stimulus package during the western financial crisis.

Since 2009, Hong Kong lending to Chinese companies has increased from about HK$700m to more than HK$3bn, according to Citigroup.

Fitch, the rating agency, calculates that banks’ gross exposure to mainland China is now 31 per cent of assets, up from 11 per cent at the end of 2009.

Chikako Horiuchi of Fitch’s financial institutions group says: “Cross-border financial links have cemented, with growing loan demand in China financed by Hong Kong-based banks. This development reflects tightening monetary conditions on the mainland.”

Some expect Yue Xiu’s ownership of Chong Hing – if the deal is completed – to have some policy role in terms of ensuring finance flows to Guangzhou companies.

Ultimately, the last four family-controlled Hong Kong banks will struggle to survive independently because of the higher costs of business in everything from regulatory compliance, staffing and capital, according to Alison Kennedy, a financial services consultant at Accenture.

Competition from mainland-owned institutions such as Bank of China has also become more intense in recent years and that will continue as ICBC Asia and others make more headway in the city.

Banks from elsewhere in southeast Asia have been looking at the Hong Kong lenders, but mainland buyers are likely to pay the highest premium, Ms Kennedy adds.

“You should also watch for non-bank bidders from the mainland who want to expand into consumer- focused financial services, such as retailers and especially insurers,” she says.

“In five years, I don’t think there will be any family-controlled banks in Hong Kong.”

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.