AgBank Eyes Baby Step Onto Global Stage

By newsdoug on September 30, 2013

AgBank eyes HK’s Wing Hang

Agricultural Bank of China (HKEx: 1288; Shanghai: 600188), the last of China’s “big 4” banks to go public, is now becoming the last of the quartet to eye a global expansion, with word that it’s weighing a bid for Hong Kong’s Wing Hang Bank (HKEx: 0302). I’m generally not a huge fan of AgBank, mostly because its history as a lender to farmers and other agricultural enterprises makes it the least market-oriented of China’s biggest 4 national lenders. But that said, this baby step onto the global stage looks like a relatively well conceived plan for perhaps some bigger steps in the next few years.

According to the latest reports, AgBank is the most interested party in buying Wing Hang, which disclosed last week that it had received several takeover offers. (English article) Wing Hang didn’t disclose the names of any potential suitors, but I do suspect that news of AgBank’s interest is probably correct since the original report came from the 21st Century Business Herald, one of China’s leading and most respected financial newspapers.

Wing Hang is a relatively large player in Hong Kong’s well developed banking sector, with more than 50 branches in the former British colony. Wing Hang shares have shot up around 40 percent since the original rumors emerged, giving it a market capitalization of more than $4 billion. A takeover would follow China Merchants Bank’s (HKEx: 3968; Shanghai: 600036) $2.5 billion purchase 5 years ago of a controlling stake in Wing Lung Bank, another major Hong Kong lender. China’s biggest bank ICBC (HKEx: 1398; Shanghai: 601398) also has a close relationship with Bank of East Asia (HKEx: 23), Hong Kong’s largest local lender, after buying some of BEA’s North American assets over the last 3 years.

The big Chinese state-owned banks like Hong Kong because of its close cultural and geographic ties to China, combined with its strong connections to the international financial community. Accordingly, many of the state-run lenders see the city as a strategically logical place to test out global markets, with the city acting as a starting point to later global expansion.

For all those reasons, this particular move by AgBank does look relatively logical and well-conceived. I like the fact that Wing Hang is a relatively strong, experienced player in Hong Kong, and the bank’s size should be easy for AgBank to digest, even at an inflated price after the recent share run-up. If AgBank does launch a successful bid, I would expect it to pay a premium over the current share price, perhaps adding another 10-20 percent to the company’s value.

AgBank is currently the only of China’s “big 4” lenders that doesn’t have a retail banking license in Hong Kong. The other 3, ICBC, Bank of China (HKEx: 3988; Shanghai: 601398) and China Construction Bank (HKEx: 939; Shanghai: 601939), all made public listings in Hong Kong in the mid-2000s, and have all been active in the city for a while. AgBank made its Hong Kong IPO much later in 2010, as it cleaned up its larger bad assets and addressed other operational issues.

Since the listings, ICBC has been the most aggressive of China’s top lenders globally, buying major assets and opening branches in Africa, the Middle East and the Americas. Bank of China has also been relatively active, while China Construction Bank has been less active so far. AgBank still has a difficult legacy to overcome before becoming a major global player, due to its limited experience in finance outside the agricultural sector. But that said, this potential Hong Kong acquisition looks like a smart move in the right direction, and could be followed by more similar moves into Southeast Asia and other nearby markets over the next 5 years.

Bottom line: AgBank’s interest in Wing Hang Bank looks like a smart first step into the global marketplace, and could be followed by similar deals in the next 5 years.