Bank of East Asia’s David Li wants the Hong Kong lender to stay independent long after he is gone

With it’s 100th year approaching in 2018, Hong Kong-based Bank of East Asia has seen it all – and may soon see the retirement of chairman David Li

PUBLISHED : Friday, 13 May, 2016, 9:43pm
UPDATED : Friday, 13 May, 2016, 9:43pm

As the bank founded in 1918 by his grandfather Li Koon-chun approaches its 100th year in business, Bank of East Asia chairman David Li hopes the lender will remain an independent Hong Kong bank long after he is gone.

Having witnessed other local banking families sell their stakes one by one to foreign and mainland banks instead of to other Hong Kong banks over fears of “loss of face”, Li took personal affront when US hedge fund Elliott Advisors suggested BEA should also sell out, especially after Li had navigated the bank through many hard battles compressed into a few recent short years.

These include a bank run that shook it to the corein 2008 and the burgeoning mainland China bad debt crisis. To this day, Bank of East Asia – the first bank founded by a local Chinese – is among the few that still remain under Hong Kong Chinese control – and by far the biggest.

In an exclusive with the South China Morning Post, Li hinted publicly for the first time that his retirement will be “in the foreseeable future”, adding that his successor won’t necessarily be one of his two sons, Adrian and Brian, who serve as two of the bank’s four deputy chiefs.

“I hope we can stay independent and be the best service bank in Hong Kong and China -–the best foreign bank in China serving both China and Hong Kong well – we would like to help Chinese companies go overseas in the financial capitals of the world,” Li said on Friday after receiving a lifetime achievement award from Asian Banker for his 35 years of service to the banking industry at the helm of Bank of East Asia.

Outside of his own bank, Li served 27 years as a Legislative Council representative until 2012, a role that saw him fighting for the local banking industry against colonial government policies favouring competition from British banks – a battle that other prominent bankers still speak fondly of.

With retirement now on the horizon, the question of succession is being talked about.

“It’s up to my board of directors to decide who will be the best to succeed me. We have always had a succession plan,” he said. “It’s not necessarily Adrian or Brian.” If that does happen, it would be the first generation to potentially disrupt the Li clan’s succession tradition in a century.

“Adrian and Brian work with my other very senior advisors and experienced colleagues. They learn from colleagues on how they should behave and treat their clients. It’s not them who run the bank - teamwork does,” added Li.

Elliott Advisors, which has amassed a US$3.5 billion stake in BEA, equal to 7 per cent of the stock, had encouraged a campaign suggesting that the appointment of Li’s two sons as deputies was a case of nepotism. But even as the hedge fund continues to be a source of aggravation in the background – it has in four cases unsuccessfully tried to hustle listed Asian firms for higher returns in the name of “public activism”– Li said he will never offer to buy out their stake.

“Buying them out would mean defeat for us. We consider it very much a war. I receive a letter from them every week, asking for this and that. They want to put pressure on ... to sell the bank. They are suggesting all types of things we are not,” said Li.

Among Elliott’s allegations are that BEA has underperformed and that it squandered share placements to Japanese conglomerate Sumitomo and Caixa, a Spanish charitable foundation that’s the third largest after the Bill Gates Foundation and the Wellcome Trust in the UK.

This Elliott-led activism was a factor in small shareholders casting up to 30 per cent of the votes against renewing Li’s terms as a director at the bank’s latest annual general meeting.

“They expected the bank to perform better. And we should have performed better. I do not blame them. I blame myself,” said Li

“[Elliott] said our placement to Sumitomo was a wrong move, and we should have had a rights issue. But a rights issue would have meant we would have to discount the shares by 30 to 40 per cent or more. And we would have to pay a fee to underwrite the shares. We would have got much less than what we [got]. We placed the shares at a premium to a strategic shareholder. I just could not understand the logic of what they accused us of.”

As a member of the Hong Kong Basic Law drafting committee, Li first saw the potential of China in the 1980s and 1990s, which motivated him to take the industry lead in expanding into China. This first mover advantage saw BEA create the mainland’s second biggest foreign banking network with 129 branches and sub-branches in over 45 cities.

That coverage first translated into record profits, but lately has turned into one of the worst non-performing loan situations among its banking peers. Nonetheless, Li said he’s happy with what has been achieved, even in face of “head on competition” amid China’s latest foreign exchange and interest rate liberalisation policies.

“I would be more happy if not for the recent downturn in China. The downturn last year was very difficult for us,” said Li, conceding that the mainland had overexpanded credit in the crisis years and that had now come back to haunt China.

“I won’t say it is the worst [crisis in my career], but it definitely is shaping up to be a quite bad one. We have to be realistic. We have to face facts. This is the situation,” he said.

“I don’t think the downturn is going to last that long. Towards this year or early next year, we’ll see an upturn. But at the moment, we are still suffering. Everyone is...but I am confident the future is bright. We’ll continue to grow but we won’t grow as fast as before.”

Whereas early in his career as head of the family bank Li had to navigate around the monopolies of British banks protected under the colonial government’s policy, today’s competition has shifted in favour of mainland Chinese challengers.

I won’t say it is the worst [crisis in my career], but it definitely is shaping up to be a quite bad one
David Li, chairman, Bank of East Asia

Li believes there will always be a difference between Hong Kong and mainland banks, even with continued policy opening by Beijing.

“In renminbi, Bank of China is going to dominate because they have a renminbi base in China, so it’s to their advantage. And we in Hong Kong, being a Hong Kong bank, will always have a slight disadvantage. But Bank of China is quite fair to other banks, unlike before [when British banks dominated],” he said.

Knowledgeable industry sources say HSBC never granted a real credit line to BEA. To this day, the highest it has ever been was at HK$25 million.

To compete against much larger lenders, BEA found its niche through better service and reputation.

“We support our customers through thick and thin. Good and bad times,” Li said, acknowledging that the high NPL levels are partly a result of this approach.

Asked if he has any lessons to pass on to young people, Li said he has always gone by a motto carved into a wooden ornament given to him by his guardian when he was first sent alone to an English public school at the age of 13. It reads:“There is a million reason for failure but not a single excuse.”

“Banking is all about relationships, and the personal touch. When I call on our customers, I still feel great satisfaction when they tell us how they grow their business, what they would like to do and how they consider Bank of East Asia was of help to them. They wouldn’t go to other banks. I’m very happy when I hear that.

“You know whether to back your client, whether you trust your client, even they may make a bad loan today. It’s a matter of judgement and experience.”