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Louis Beckerling

United States banking group Chase Manhattan has put its retail banking business in Hong Kong up for sale in a tender process that could attract bids of more than HK$6.72 billion.

Chase declined to comment, but banking sources close to the deal said buyers were given until yesterday to submit opening 'indicative bids'.

'They are selling all their retail business - the branches, mortgage loans, consumer finance, credit cards - everything that is not wholesale,' said one bidder.

'They have made a strategic decision to quit the retail business and focus on wholesale and investment banking alone,' he added.

Chase is in the process of buying investment bank Robert Fleming and its Asian arm Jardine Fleming.

Analysts said the tender process would most likely result in an aggressive bidding war since cash-rich Hong Kong banks were struggling to grow their loan books organically.

'If this business is really up for sale it would be hot property,' said Lehman Brothers banking analyst Grant Chan.

'We are in a market that is showing no loan growth and consumer loans are high-yielding. They would be very desirable assets in the present circumstances.

'Guys like Bank of East Asia, Hang Seng, Dao Heng are all highly capitalised and would love to get their hands on this,' added Mr Chan.

Bank of East Asia yesterday confirmed a report in the Hong Kong Economic Journal that it had submitted a bid.

The sale by Chase, the second-biggest bank in the US, comes amid expectations that the competitive local banking industry will undergo consolidation in the next few years.

The bidder said he believed about 10 bids were made by yesterday's deadline and speculation was that Singapore's DBS Bank had been most aggressive in its pricing.

The book value of Chase's branch banking operation in Hong Kong is not provided in the mandatory disclosure made to the Hong Kong Monetary Authority.

However, applying the less-frequently used earnings-based approach to valuation suggests that bids for the group's entire retail banking operations may begin at about HK$6.72 billion.

The starting point in the pricing exercise would be the jewel in Chase's retail crown - its card company - which last year disclosed profit of HK$2.26 billion on credit card receivables of HK$5.45 billion and total assets of HK$7.72 billion.

No profit breakdown was provided for the branch banking business in its disclosure to the HKMA.

But a summary disclosure of branch banking assets - a little more than half of which were inter-branch loans made within the region - put the total loanbook at HK$110.2 billion.

An operating margin at the sector benchmark levels would give an operating income of between HK$2.2 billion and HK$3.3 billion.

Applying an industry benchmark cost-income ratio of about 50 per cent suggests that net earnings from the branch business (which discloses no fee income) could have been somewhere between HK$1.1 billion and HK$1.65 billion.

That means net profit for retail banking of between HK$3.36 billion and HK$3.91 billion.

Since the best guess of bankers and analysts was that bids might be pitched at somewhere between two and four times earnings, this arithmetic suggests bids might begin at HK$6.72 billion, but might even reach double this figure.

The third arm of the group's Hong Kong operations is Chase Manhattan Asia, which reported net profit of US$32.8 million last year from its investment banking and capital market activities.



Bids on Chase branches expected to top $6.7b