Banks rich pickings as secure entry to China (hktdc.com)


	Hong Kong's strong banking sector emerged unscathed from the Asian financial crisis, adding to its attraction for overseas investors

Hong Kong banks are being eyed as attractive acquisition targets by financial institutions looking for quality assets - and for exposure to China's growth story.

The trend was underlined by Public Bank, Malaysia's third biggest lender, acquiring Hong Kong's Asia Commercial Bank (ACB) for US$580 million in February. More such deals are likely around the corner, analysts say.

"Banks, especially Asian operators, are keen to get into Hong Kong and use Hong Kong as a springboard to China," said Louis Wong, Research Director of Phillip Securities.

ACB's parent Asia Financial Holdings decided to dispose of the bank to focus on building its insurance business. The tendering process drew a crowded field of 12 bidders from which Public Bank's Hong Kong consumer loan unit JCG Holdings was eventual winner. What surprised financial markets was the rich valuation ACB commanded of 2.5 times its book value or 42.9 times its 2004 net profits. Taiwan's Fubon Financial Holding has acknowledged being among the losing bidders. Thailand's biggest lender Bangkok Bank and Malaysia's Hong Leong Bank were reportedly among other foreign institutions which lodged bids.

In announcing the deal JCG said: "The JCG directors believe that the transaction represents a good opportunity for JCG to expand its franchise in Hong Kong and greater China."

Asia Commercial Bank has a network of 12 branches in Hong Kong, a branch just over the Chinese border in Shenzhen, representative offices in Shanghai and Shenyang and a further rep office in Taipei, Taiwan. Public Bank could use those operations as a foothold to build a bigger presence in China where the banking industry is growing rapidly, in line with an economy which is growing at a pace of nearly 10 per cent a year and has already overtaken Britain to become the world's fourth biggest.

Growing hunger

The hunger for banking routes into China is growing, with the country due to lift restrictions on foreign institutions' involvement in retail banking in the local currency at the end of this year, five years after China's entry to the WTO.

"Everyone is watching for opportunities in China. According to the WTO [agreement] the industry has to further open up," said Steven Leung, a sales director at UOB KayHian Securities.

Most Hong Kong banks have been building branch networks in China for years and are starting to see their efforts bear fruit. Medium-sized lender Bank of East Asia (BEA) reported a 17 per cent rise in net profit for last year to HK$2.75 billion (US$354 million), with its 23 outlets in China contributing HK$290 million (US$37.3 million), up an impressive 75 per cent from 2004 as it tapped mushrooming demand for loans and other banking services.

"BEA is seeing its profit contribution from China grow by leaps and bounds," said Phillip's Mr Wong.

Using a Hong Kong bank to build a branch network in China is the "safest" option for a foreign lender such as Public Bank to gain access to the market, he said, as it will be able to retain complete control of the operations. Singapore's biggest bank DBS paid HK$42 billion (US$5.4 billion) to acquire Hong Kong's Dao Heng Bank in 2001 and has used the bank to increase its presence in China. The restructured DBS (Hong Kong) has a branch in Shenzhen and representative offices in four other cities.

Taiwan's Fubon bought control of small Hong Kong lender International Bank of Asia for nearly HK$778 million (US$100 million) in 2004. Fubon is now considering using the Hong Kong bank as a vehicle to buy a stake in a Chinese regional bank, Forbes magazine reported in January. Taiwanese banks face tough domestic regulations about their investments in China.

Global giant HSBC enjoyed a profit bonanza from China in 2005 with the contribution from the country leaping more than ten-fold to HK$2.6 billion (US$334 million) HSBC has both its own branches in China and a 20 per cent stake in Bank of Communications, China's fifth biggest lender. China's strict controls on foreign banks have meant they have only limited branch networks in China. HSBC, for example, has only 12 branches and nine sub-branches, while one of the biggest US banks, Bank of America, has just three branches. It paid HK$23.3 billion (US$3 billion) for a 9 per cent stake in China Construction Bank, one of China's Big Four lenders, which has 14,250 branches strung across the country.

Taking a stake in a major Chinese bank can be a quick route to big exposure to China but is also risky as foreign shareholders are limited to a 20 per cent stake and therefore are not in the management driving seat, said Mr Wong.

Unique advantage

Hong Kong's Closer Economic Partnership Arrangement (Cepa) with China allows earlier and easier access for Hong Kong corporates to China's markets than the WTO agreement and has facilitated their build up of branch networks in China. But Hong Kong banks are also unique in being the only foreign entities in the world allowed to take deposits in China's renminbi (or yuan) currency as part of the Cepa deal.

Other moves are being made to slowly integrate banking services between Hong Kong and China. In March, the Hong Kong Monetary Authority inaugurated the renminbi settlement system, which allows renminbi-denominated cheques drawn on Hong Kong banks to be cleared by banks in adjoining Guangdong province in China. Cepa also means Hong Kong banks only need to prove they have HK$46.7 billion (US$6 billion) in assets as a precondition to setting up branches. The bar is set higher at HK$155.6 billion (US$20 billion) for overseas institutions.

Besides the China angle, Hong Kong banks are attractive because of their financial structures and lending practices are among the best in Asia. Hong Kong banks emerged unscathed from the Asian financial crisis which began in 1997 and resulted in a decline in up to 70 per cent in Hong Kong property prices. That banking expertise is an invaluable commodity for foreign institutions looking to expand in Asia. China Construction Bank, one of the mainland's Big Four state lenders, was reportedly among the bidders for ACB and has said it would look at other possible targets.

"There are still one or two second tier banks which could be bought. There are push and pull factors likely to cause the transactions to take place," said Mr Wong.

The push factor is intensifying competition in Hong Kong's domestic banking sector with the two biggest players HSBC and Bank of China (Hong Kong) offering aggressive lending and deposit rates which smaller players are hard pressed to follow. The pull factor, said Mr Wong, is the rich valuation benchmark set by the ACB deal.