Purchase set to stretch buyer's resources after long-muted takeover of red-chip receives mainland clearance

Citic Ka Wah Bank is poised to announce it has won approval from mainland authorities to take over fellow red chip Hongkong Chinese Bank (HKCB), according to market sources.

No official comment could be obtained from either bank, which are mainland-controlled but locally listed and incorporated, but observers close to the deal said an announcement was 'imminent'.

'Our understanding is that agreement in principle and on price was reached some time ago,' one observer said yesterday.

'The key problem was that approval from the mainland was required for the deal to proceed, and the delay arose because top mainland leaders had put policy decisions on hold while they focused on [World Trade Organisation] accession issues.'

However, the top policy-making bodies had now endorsed the takeover, and Wang Jun, chairman of Citic Ka Wah Bank's leading investor, China International Trust & Investment Corp (Citic), was reported to be in Hong Kong last week to put the finishing touches to an agreement.

A senior banker said yesterday: 'An announcement is imminent'.

All banking deals involving mainland-controlled banks require People's Bank of China and State Council approval.

Citic, the mainland's largest investment company under the control of the State Council, holds 55.24 per cent of Citic Ka Wah Bank, an association that began in 1985 when it came to the rescue of Ka Wah Bank as it was then known with a HK$350 million cash injection to recapitalise it.

HKCB is 64.8 per cent controlled by China Resources Enterprises (CRE), which is the locally listed arm of China Resources Holdings, an unlisted unit of the Chinese Foreign Trade Ministry.

CRE confirmed in May that it planned to sell its stake in HKCB, in line with a restructuring under way by its parent.

Citic Ka Wah has long been considered a front-runner to take over the stake and as far back as October last year it unveiled a HK$15 billion funding programme to accumulate a take-over war chest.

At the time it launched a failed bid for First Pacific Bank, which was eventually taken over by Bank of East Asia.

'Citic is likely to be stretched by a bid,' said UBS Warburg bank analyst Tracy Yu in response to yesterday's news.

'We estimate that if a general offer price is pitched at HK$3.60 it would be earnings' neutral to Citic, but even at that price it would stretch Citic's resources.'

Ms Yu said Citic had so far issued US$250 million in subordinated debt to add to excess capital of about US$160 million.

'That would still fall short by around US$120 million in making up a takeover, so they are likely to require another capital raising.'

A bid pitched at HK$3.60 would price HKCB at HK$4.86 billion, or US$625 million.

HKCB ended unchanged at HK$3.275 yesterday, which capitalised the bank at HK$4.42 billion.

Citic Ka Wah closed at HK$2.275, down 2.5 cents from Monday's close, and capitalised at HK$5.9 billion.

With assets of HK$59.07 billion, Citic Ka Wah outranks its smaller red-chip cousin, which reported assets at June 30 of HK$22.97 billion.

Citic employs more than 1,000 staff and operates 26 branches and a wealth management centre in Hong Kong, as well two branches in the United States.