Fubon's foray into HK raises questions

The Taiwan company's acquisition of International Bank of Asia appears to be a long-term strategy to enter China

There is no question that Arab Banking Corp has been keen to sell its 55 per cent stake in International Bank of Asia (IBA) for some time. The consensus also seems to be that Taiwan's Fubon Financial Holding is picking it up at a reasonable price.

What is not abundantly clear is why.

Fubon, Taiwan's second-largest financial company, announced on Monday its 55 per cent acquisition in Hong Kong's smallest listed bank IBA from Arab Banking Corp.

The HK$2.37 billion price values IBA at 1.16 times book value and is a record low among targets of similar size. Last month Wing Hang Bank offered to pay $4.8 billion for Chekiang First Bank, equivalent to 1.22 times book value.

IBA is, however, a small high-street player facing increasing marginalisation in a fiercely competitive market. With just 25 branches and a market share of less than 1 per cent, growth hinges on economic factors beyond its control. In the first half of this year, net profit plunged 45.6 per cent amid what it described as a 'brutal environment for banking'.

As with other small players, IBA is under pressure to diversify its income source but is constrained by size. Larger banks have turned to other areas such as personal wealth management with the benefit of size and a strong brand. Smaller banks with the money have attempted to build the scale through acquisitions. Further domestic consolidation seems inevitable.