A US$11BILLION MAKEOVER of Macau is under way, and Hong Kong lenders and capital markets can play a key role in transforming the city into a global tourist destination. Analysts say if the investment programmes bear fruit, gaming revenues - which account for about half of Macau's gross domestic product - will expand massively and ensure that its rapid economic expansion continues. 'That will mean added activity for Hong Kong's financial services sector through IPOs [initial public offerings], potential M&A [mergers and acquisitions] activity and financing of investments,' says Amar Gill, head of Hong Kong research for brokerage house CLSA. It will also ensure that Hong Kong banks that do not have a foothold in Macau's finance sector may be tempted to join their rivals already established in the market, notably Wing Hang Bank and, more recently, Dah Sing Bank. Credit Suisse banking analyst Bill Stacey says: 'Macau's banking market is less competitive than the Hong Kong market. Margins are wider and returns are higher.' He believes more offshore banks may be encouraged by the economy's strong growth prospects and comparatively higher lending margins to set up operations in Macau. But as newcomers such as Dah Sing enter the market alongside long-established Wing Hang Bank, competition will probably increase and this will narrow margins, Mr Stacey says. The biggest challenge to late arrivals, if they choose to set up in Macau rather than serve the market from Hong Kong, will be finding good branch locations at reasonable prices. 'Of course, in terms of the big financing of gaming and property developments, banks don't have to be in Macau to do that. But as the market place grows they may wish to follow their customers, and regulations would seem to encourage such a move,' he says. The attractions of the Macau market for lenders are underlined by an explosive growth in bank assets last year - up 26.6 per cent to 216.5billion patacas, according to the Monetary Authority of Macau. Although small when compared with Hong Kong's banking sector (total assets last year of HK$7.25trillion), such growth rates are significantly higher than the expansion of bank assets in the mature market in Hong Kong. The Macau banking regulator says the expansion of bank assets is the result of the sector being called on to fund Macau's sustained economic growth. 'On the business front, the banks have broadened their service domain. More products have been made available, customer services have been enhanced, business practices and functions have been reinforced, service standards and business development have been improved,' the authority notes in its 2005 annual report. Underlining Mr Stacey's comments that lending margins in the Macau banking market are more generous than those in the Hong Kong market, the 26.6 per cent expansion in assets translates into a 123.6 per cent increase in aggregate sector profit of 31billion patacas for the year, according to the regulator. Three new institutions entered the sector last year, two of them engaged in offshore banking. In June this year, ratings agency Standard & Poor's ('Macau versus the Las Vegas Strip: Which will be the bigger winner?') forecast that Macau is set to replace Las Vegas as the world's biggest gaming market in the next few years. S&P points out that Macau has more than 100 million people living within a three-hour drive. With the arrival of deep-pocketed international gaming companies, the city's revenues from 'games of fortune' are expected to surge from an estimated US$5.6billion last year to more than US$10billion in the next five years. Anthony Nafte, CLSA senior economist, says the makeover of Macau will translate into opportunity for Hong Kong banks. 'The mechanics of Macau have changed. The liberalisation of the gaming sector in 2002 raises parallels with what happened in Las Vegas, which became the fastest-growing metropolis in the United States,' Mr Nafte says. 'We see a similar surge in growth unfolding in Macau over the next three or four years.' Those growth prospects, says Mr Nafte, will be attractive to Hong Kong banks. 'Sure, they could serve the market from Hong Kong without having a physical presence in Macau, but then there would be the spin-offs from the gaming sector that will see expansion in property and the wider entertainment and tourist and convention markets. And that is where Hong Kong banks would like to have a presence.' One of the newcomers is Hong Kong's Dah Sing Bank, which last December wrapped up the 1.73 billion patacas acquisition of Banco Comercial de Macau (BCM), Macau's third-largest bank by branch numbers (16), and eighth-largest by assets. Included in the deal was the group's general and life insurance business. Bank chairman David Wong Shou-yeh says the acquisition represents a significant strategic expansion for the group. 'It represents the group's entry into the Macau market, which is an increasingly affluent market with a growing economy, and allows the group to gain significant market share in each of the banking, general insurance and life assurance businesses,' he says. In its annual report for last year, Dah Sing said BCM had reported a net profit of 90 million patacas last year, up 50 per cent on 2004, while its two insurance subsidiaries recorded a total profit after tax of 12.5 million patacas in the year. Larger Hong Kong rival Wing Hang Bank, meanwhile, has been in the marketplace indirectly for more than 70 years, and with a wholly owned subsidiary since 1985. It has built its Macau operation into a significant contributor to group profit. Banco Weng Hang was established in the 1930s by the shareholders of Wing Hang Bank, which eventually bought out the Macau operation in 1985 and consolidated it within the Hong Kong group's operations. Wing Hang Bank chairman Patrick Fung Yuk-bun says: 'As a wholly owned subsidiary of Wing Hang Bank, Banco has benefited in areas such as technology assistance, product development and management. Wing Hang Bank has benefited from a geographic diversification in a city where the Hong Kong dollar is the predominant currency for business.' The Macau subsidiary contributed 13.7 per cent of group earnings last year. That was down from 15.6 per cent in 2004 as a result of investment costs in opening a 12th branch that year and narrowing marketplace margins. 'Competition has already been on the increase in Macau as more Hong Kong banks are doing business there and existing Hong Kong Banks have expanded their presence there,' Mr Fung says. Wing Hang is keeping an open mind about pursuing expansion opportunities in the territory. 'We will continue to investigate opportunities as they arise in Macau,' he says.