Guangzhou Buys HK Bank, More To Come?
A new deal that has seen a mid-sized Hong Kong bank purchased by a government entity of the southern city of Guangzhou is raising the interesting prospect that we could soon see a grab for similar banks by Chinese lenders looking to go global. As a financial center with strong cultural and geographic ties to the mainland, Hong Kong is a natural stepping stone for any Chinese bank that might want to move beyond its home turf, where politics dominate many decisions, into Asian markets where profits are the driving factor. That urgency to move abroad could become stronger in the next few years, as China signals it will soon open up the state-dominated banking sector to private investors.
All 4 of China’s big national lenders would be natural candidates for acquisitions of Hong Kong banks, with industry leader ICBC (HKEx: 1398; Shanghai: 601398) and Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) already making hints in that direction. Major second-tier lenders like Bank of Communications (HKEx: 3328; Shanghai: 601328) could also be prime buyers, as these banks could also digest acquisitions in the $1-5 billion range with relative ease. One other group that could join the bidding is major brokerages like Citic Securities (HKEx: 6030; Shanghai: 600030), which recently made a major push abroad with its purchase of CLSA Securities.
Against that backdrop, let’s take a look at the latest reports that say Yue Xiu Group, which is the trading arm of the Guangzhou city government, is buying three-quarters of Hong Kong’s Chong Hing Bank (HKEx: 1111) for $1.5 billion. (English article) The deal marks the first major purchase of a Hong Kong bank by a mainland peer since China Merchants Bank (HKEx: 3968; Shanghai: 600036) bought Wing Lung Bank in 2008 in a deal valuing the latter at $4.7 billion. The reports say bidding for Chong Hing, which is controlled by the Liu family, first began in August, and the company’s shares have risen 66 percent since then.
This sale comes just a month after media reported that Agricultural Bank of China was one of several suitors seeking to buy a similar-sized Hong Kong bank, Wing Hang Bank (HKEx: 302). (previous post) Singapore’s Overseas Chinese Banking Corp (Singapore: OCBC) is also reportedly interested in Wing Hang.
OCBC’s interest in Wing Hang, and now this latest deal involving the Guangzhou city government, underscore that Hong Kong banks are not only stepping stones for China to tap other Asian markets, but also can help bring Asian business into China. That positioning could become increasingly important as China moves to internationalize its currency, the yuan, with Hong Kong emerging as a major center for yuan-based services.
Chong Hing’s sale means the number of suitable takeover targets in Hong Kong is quickly diminishing, with just a few family-controlled lenders left. Two remaining candidates are Bank of East Asia (HKEx: 23) and Dah Sing Financial (HKEx: 440), which have market values of about $10 billion and $2 billion, respectively. Bank of East Asia already has a relationship with ICBC, which has purchased major stakes in some of the Hong Kong bank’s North American assets.
I wouldn’t be surprised to see ICBC make a play for a major stake in Bank of East Asia in the next year or two, partly to cement its partnership and also to prevent potential rivals from forming their own tie-ups. It also looks like Wing Hong could soon lose its independence, though I don’t know enough about the deal to say if AgBank will win the bidding. In the meantime, the last few remaining family-controlled banks are likely to form their own new tie-ups with Chinese partners in the next couple of years, bolstering Hong Kong’s reputation as an important financial stepping stone between China and the rest of the world.
Bottom line: Chong Hing Bank’s purchase by a Chinese entity presages a coming grab for remaining Hong Kong family-controlled lenders by mainland buyers.
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