BANKING: Bank Of China Creates SE Asia Play
Bottom line: Bank of China’s plan to create a Southeast Asian unit around its Hong Kong-based BOCHK looks like a smart move that will give investors a chance to buy shares of its more commercially-focused global operations.
Chinese banks have always been a difficult investment option for westerners due to their heavy reliance on China, where they take orders from Beijing leaders that use them as an economic policy tool rather than letting them act like real commercial lenders. The banks’ international operations are more interesting from an investor’s perspective, as they tend to behave more commercially because they have to competite in markets where they don’t enjoy any special government-granted advantages.
The problem is that international operations are usually just a tiny business for most of the big Chinese banks, even as industry leaders ICBC (HKEx: 1398; Shanghai: 601398) and Bank of China (HKEx: 3988; Shanghai: 601988) spend billions of dollars on offshore acquisitions and other overseas expansion. That’s why a new plan by Bank of China looks particularly exciting, as it will finally give stock buyers an option to invest exclusively in the company’s offshore operations, in this case in Hong Kong and Southeast Asia.
Bank of China says it is currently considering a plan that would see it dump its stake in Hong Kong-based Nanyang Commercial Bank, and roll all of its Southeast Asia assets into its Hong Kong-listed subsidiary BOCHK (HKEx: 2388). (company announcement) Bank of China only says that it is currently working on the plan and doesn’t provide any addition timetables or other information.
It’s unclear what assets the bank actually owns in Southeast Asia, and I suspect they are limited to perhaps a few small stakes in local banks and other financial institutions in countries like Thailand, Malaysia and Singapore. But more significantly, this kind of reorganization would create an entity with a mandate to develop the Southeast Asian market independently of Bank of China’s much larger China operations.
That’s a very important distinction for the reasons that I’ve described above, and I also like Bank of China’s particular structuring of this reorganization. BOCHK was one of the earliest offshore entities to be set up by China’s big 4 state-run lenders, and thus has a relatively long history working in a more commercial environment in Hong Kong. Thus it should have the experience and background to take over operation of a big regional bank like the one that is being envisioned. I also like the idea of limiting the new bank’s scope to Southeast Asia, as many of the region’s markets share similar characteristics.
We should probably also make quick mention of the Nanyang Commercial Bank part of the announcement, which was first in the headlines back in February when media reported that Bank of China was looking to sell the asset. (previous post) Reports at that time indicated there were few interested buyers for the stake, whose owner, BOCHK, was hoping to get up to $6 billion for the asset.
Bank of China says in the latest announcement that it has completed a study and determined that a sale of Nanyang would be consistent with its longer term development strategy for the region. That indicates that BOCHK intends to go ahead with the sale, though it could ultimately get far less than the $6 billion it was originally seeking.
But even if it gets just $3-$4 billion, that would still give BOCHK a relatively big war chest to embark on a campaign to build up its Southeast Asia operations through a series of acquisitions and organic growth. Many Southeast Asian markets like Myanmar and Vietnam are certainly in need of new banks, and Bank of China could also offer the advantage of strong ties to Chinese companies and access to the Chinese yuan as Beijing looks to globalize the currency. We’ll have to see how BOCHK proceeds with this new mandate, but at least initially it looks like a potentially exciting alternative to investing directly in any of China’s big state-run banks.
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