Benchmark of Value :
Chong Hing yardstick for HK bank M&A
Yue Xiu Group’s potential purchase price for Chong Hing Bank reflects the economic slowdown in mainland China and competition in Hong Kong.Yue Xiu Group’s possible purchase of Chong Hing Bank looks reasonably priced given the slowdown in mainland China and competition in Hong Kong, analysts said on Thursday, after trading in the shares of the small, family run bank was suspended, pending an announcement.
Analysts estimated the sale value at around 2.1 times 2013 price-to-book, based on Chong Hing's October 23 closing price -- slightly above the average 1.93 multiple paid for Hong Kong-based banks in recent decades, according to analysts at Goldman Sachs.
The expected valuation of Chong Hing, which has a market capitalization of about US$2.09 billion, is nonetheless below that of some notable recent transactions, including state-controlled China Merchants Bank’s HK$17 billion purchase of a 46.9% stake in Wing Lung Bank, which changed hands in 2008 at 2.9 times historical book value. Singapore-based DBS Group also bought Dao Heng Bank in 2001 for a price that was 3.3 times its historical book value.
“This possibly, in part, reflects [the] lower current ROE & ROA for Hong Kong banks compared with 2000 to 2007, as well as CHB’s smaller franchise,” said Christopher Lai, an analyst at Bank of America Merrill Lynch in Hong Kong. According to Lai, Chong Hing Bank controls less than 1% of all HK system deposits and loans.
Yue Xiu's looming acquisition is backed by a $1 billion bank loan, a person familiar with the matter said, after trading in Chong Hing Bank shares was suspended in Hong Kong pending the M&A announcement.
Nomura is advising Yue Xiu and providing finance, a second well-placed source said, adding that the Chinese group had overcome the concerns of Hong Kong's banking regulator about a non-banking firm taking over Chong Hing Bank.
Fierce competition has dented the profitability of Hong Kong banks in recent years. Mainland Chinese banks have been expanding aggressively in the financial hub since around 2000. Six of the top 10 Chinese banks in Hong Kong expanded their balance sheets by double-digit percentage points from 2011 to 2012, according to consultancy KPMG’s analysis.
The incursion by mainland lenders has added to an already tough position for Hong Kong's banks; net interest margins are at historically low levels and competition for funds is intense.
Hong Kong’s biggest banks - HSBC, Standard Chartered, Hang Seng Bank and Bank of China (Hong Kong) - hold about 53% of Hong Kong citizens’ deposits.
In addition, loan growth is set to slip as mortgage lending slows. The Hong Kong government’s efforts to cool the city’s soaring property prices have slowed the sales of homes. Property transactions in May dropped to 5,288, well below the five-year average of 10,313 between 2008 and 2013.
Hong Kong’s banks are also beset by slowing growth and climbing credit costs related to their China portfolios as the Middle Kingdom’s economy slows.
Most Hong Kong based banks have established locally incorporated subsidiaries in mainland China. Following years of rapid expansion, growth in net profit slumped from 139% in 2011 to 3% in 2012, according to an analysis by KPMG. Wing Hang was among the banks most hit.
All this is against a backdrop of increased regulatory scrutiny and rising costs from having to comply with a raft of new rules, most of which are globally driven such as Basel III.
CHONG HING PRICE CREATES BENCHMARK
The take out price for Chong Hing creates a benchmark for further M&A among Hong Kong’s family-owned banks, say banking analysts, possibly even a floor for Wing Hang Bank, which has a stronger crossborder corporate banking practice and a wider branch network in China.
Wing Hang Bank said in a statement to the Hong Kong Stock Exchange in September that its controlling shareholders, including members of the Fung family and Bank of New York Mellon, had been approached by third parties about selling their shares. Wing Hang has also hired Nomura to advise it on the approaches, said a person familiar with the matter.
China Life, Singapore’s United Overseas Bank, and Australia’s ANZ and other Chinese financial institutions have all shown an interest in purchasing shares in Wing Hang, several sources familiar with the sitiuation have said. -- FINANCE ASIA