As Hong Kong establishes itself as a hub for offshore trade and investment in China’s currency, the city’s family-owned banks can be acquired at some of the lowest valuations since the global financial crisis.
Chong Hing Bank Ltd. (1111) is trading at the lowest price to book multiple since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while Dah Sing Banking Group Ltd. (2356) is valued at a 37 percent discount to its net assets, according to weekly data compiled by Bloomberg. With competition pushing Chong Hing, Dah Sing and Wing Hang Bank Ltd. (302) down an average of 28 percent in the past year, the prices of Hong Kong banks are “attractive” for a takeover, according to Mike Smith, chief executive officer of Australia & New Zealand Banking Group Ltd.
Suitors could be lured to Hong Kong’s financial firms as China’s promotion of its currency overseas increases opportunities to finance trade and investment in yuan, Aberdeen Asset Management Plc said. Banks in the city, which is home to the world’s fastest growing population of wealthy individuals, hold 566 billion yuan ($90 billion) in deposits and handled 92 percent of the trade settled in China’s currency last year. With smaller banks lacking the scale to stay competitive, family owners may be motivated to sell, according to Kim Eng Securities Hong Kong Ltd.
“It’s a good time to buy Hong Kong family-run banks now as the valuation of these lenders has come down a lot,” said Ivan Li, an analyst for Kim Eng in Hong Kong. “Foreign banks like ANZ are interested in Hong Kong banks because they are interested in China. If Chinese banks wanted to boost their share in the offshore yuan market, acquiring a Hong Kong bank would be a sensible way.”
Dominated by Rivals
Chong Hing is “open to all possibilities as long as they are beneficial to our shareholders, but we don’t confirm any proposals for the time being,” according to an e-mailed reply to questions. Dah Sing and Wing Hang declined to comment on the possibility of a sale.
Chong Hing rose 2.7 percent, the most in four months, to end at HK$13.88 per share today. Wing Hang ended up 0.8 percent at HK$79.25 a share, its highest since August, while Dah Sing added 1.3 percent to close at HK$7.82 a share. The city’s benchmark Hang Seng Index declined 0.4 percent.
The banks, which trace their roots as far back as 1937, are competing in a market dominated by three larger rivals.
HSBC Holdings Plc (HSBA), BOC Hong Kong (Holdings) Ltd. and Standard Chartered Plc hold a combined market share of about half of domestic loans in Hong Kong, according to Moody’s Investors Service. Eleven other banks tracked by the rating company hold another 23 percent between them, an April 12 report showed.
Near-zero interest rates, matching those set by the U.S. Federal Reserve because the Hong Kong dollar is pegged to the U.S. dollar, are already hurting profits, and “the highly competitive environment in Hong Kong has resulted in weak pricing power,” Sanford C. Bernstein & Co. analysts wrote in a April 3 report.
That may not deter buyers who are interested in the banks because of Hong Kong’s role as a gateway into and out of China, said Lewis Wan, who oversees $250 million in assets as chief investment officer at Pride Investments Group Ltd.
“Hong Kong banks have a unique role to foreign banks and Chinese lenders,” Wan said. “The buyers see Hong Kong as a stepping stone into China or a gateway to the global market.”
Still, the competition has weighed on share prices. Chong Hing, founded in 1948 and partly owned by the Liu family, has lost 33 percent in the past year, leaving it valued at about $760 million at the end of last week. At 0.86 times book value, the shares are trading at their lowest multiple since May 2009, when global equity markets were just beginning to recover from the bankruptcy of New York-based Lehman Brothers and the worst financial crisis since the Great Depression, weekly data compiled by Bloomberg show.
Dah Sing, down 38 percent in the past year, ended last week with a market value of $1.2 billion. Backed by the Wong family, the 65-year-old bank trades at 0.63 times book value, in line with what it fetched at the start of May 2009, the data show.
Wing Hang, the largest and most profitable of the three banks, has fared better, falling 11 percent in the last year and ending last week with a market value of $3 billion.
At 1.39 times book value, shares of the 75-year-old bank are also trading near their level at the start of May 2009. Wing Hang, founded by Fung Yiu-king in 1937, is currently run by his son Patrick Fung. Bank of New York Mellon Corp. (BK:US) owns 20 percent of Wing Hang, Bloomberg data show.
The three largest Hong Kong-based lenders by market value, family-owned Bank of East Asia Ltd., HSBC-backed Hang Seng Bank Ltd. (11) and BOC Hong Kong fetch an average 1.87 times book value, the data show.
‘Much More Valuable’
For potential buyers, Hong Kong’s banks offer access to yuan deposits that can be lent to companies investing in or trading with China, said Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management, which oversees $295 billion globally.
“That is much more valuable than a historical Hong Kong dollar deposit base,” ANZ’s Smith said to reporters in the city on March 23, when he also described the share prices of Hong Kong’s banks as “attractive.”
China, which has allowed Hong Kong residents to hold yuan in bank accounts since 2004, began to open the currency to other uses outside of its borders in 2009, with a program to allow trade with Chinese companies to be paid for in yuan.
Last year, that trade reached 2.1 trillion yuan, or about 8 percent of China’s total trade, with Hong Kong’s banks handling 92 percent, according to data from the Monetary Authority.
China announced on April 14 that it would widen the yuan’s trading band for the first time since 2007, signaling a drive toward a convertible currency. The increase to 1 percent from 0.5 percent will take effect today, according to the People’s Bank of China’s website.
Rules for foreign direct investment with yuan raised offshore, formalized in October, spurred companies to sell yuan- denominated bonds in Hong Kong and remit funds for operations in China. Including 12-month certificates of deposit, issuance of Dim Sum bonds rose more than four-fold to 151 billion yuan in 2011 from the year before, data compiled by Bloomberg show.
Meanwhile, deposits at Hong Kong’s banks stood at 566 billion yuan in February, up from 408 billion a year before, the data show.
“Banks really need a domestic presence to penetrate into the retail deposit sources,” said Citigroup Inc. analyst Gary Lam, who is based in Hong Kong. “For banks which don’t have substantial presence here, acquisition will be a faster way to substantially boost their market share in Hong Kong.”
‘The Real Opportunity’
Hong Kong’s banks currently hold more yuan in deposits than they can lend, on which they earn 2 or 3 percent in the interbank market or 0.63 percent from a clearing bank, said Lam. It means they’ll profit as China increases their ability to lend to Chinese companies.
“The use of Hong Kong financial infrastructure to address the need for China financing is, to me, the real opportunity,” he said.
Yuan loans in Hong Kong, called Dim Sum loans, may triple this year to 60 billion yuan as the currency becomes more globally accepted in trade and finance, Bank of Communications predicted in January. Yuan denominated trade settlement, meanwhile, may reach 3.7 trillion yuan, or 15 percent of China’s global trade volume by the end of this year, Deutsche Bank AG (DBK) analysts projected in December.
“The internationalization of yuan is the direction,” said Aberdeen’s Yeo. “Hong Kong banks would be able to ride on this so that’s their attractiveness. Hong Kong banks have gathered a lot of yuan deposits already.”
Hong Kong was also home to the world’s fastest growing population of individuals with more than $1 million in investible assets in 2010, according to a report last year by Bank of America Corp. and Capgemeni SA. Tapping these clients adds to the allure potential acquirers, said Kim Eng’s Li.
“Chinese banks can reach out to rich Chinese in Hong Kong and make them private banking customers,” Li said. “Some of their mainland Chinese clients might also seek overseas investment opportunities that are absent in domestic banks but available in Hong Kong lenders.”
Buyers would have to persuade the controlling families that they’re better off selling despite the promise their banks hold for an acquirer, said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. He projects that deals are unlikely.
“We’re part of the China story,” Antos said. “That is what makes our small banks in Hong Kong really tempting targets. For the same reason, the Hong Kong families that hold these banks really have little incentive to sell out.”
Wing Lung Bank
China Merchants Bank Co.’s deal completed in 2009 for Wing Lung Bank Ltd. valued the family-run firm at 2.9 times book value, data compiled by Bloomberg show. ANZ (ANZ)’s Smith, who lost out to Merchants Bank in the bidding, called the valuation “crazy”, suggesting that closer to 2 times book would be a fair valuation.
Even as he last month signaled an interest in buying a Hong Kong bank, Smith said that there is “quite a big difference” between sellers’ expectations about the value of their banks and what ANZ might be willing to pay. Kevin Foley, a Sydney-based spokesman for ANZ, declined to comment further.
While multiples of about 3 times book value for acquisitions are unlikely to be reached again, that may not stop the families from selling, Wan of Pride Investments said.
“Net interest margins are being squeezed, trimming profit growth and hence the bargaining power of the family owners of these lenders,” he said.
The three smaller banks are being hit harder by competition in Hong Kong. Standard Chartered’s (STAN) net interest margin in Hong Kong rose to 1.8 percent last year, while Hang Seng’s held steady at 1.78 percent. The same profitability measure at Dah Sing, Wing Hang and Chong Hing fell by 0.16 percentage points to 1.42 percent on average, according to stock exchange filings.
“The sum of money that the family can get from the sale would be much more than what they can get from running the bank,” said Li. “There’s no room for small family-run lenders. They will be acquired by the bigger banks.”
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