Doubts over Yue Xiu's 'expensive' acquisition of Chong Hing Bank

Yue Xiu Group is set to buy the family-owned Hong Kong-listed bank but its willingness to pay 2.3 price-book ratio is deemed too high

PUBLISHED : Friday, 25 October, 2013, 3:23am
UPDATED : Friday, 25 October, 2013, 4:23pm

As a mainland investment firm is set to complete the first acquisition of a local bank in Hong Kong since 2009, industry veterans are divided over one simple question - is the deal too expensive ?

Yue Xiu Group, an investment arm of the Guangzhou city government, is expected to announce its acquisition of Chong Hing Bank after months of talks with the smallest of Hong Kong's four remaining family-controlled banks. Shares of Hong Kong-listed Chong Hing have already seen a rally of 66.6 per cent since the bank said on August 7 that it was in talks for a potential takeover.

The bank, whose shares were suspended on Thursday, has seen a sharp increase in its valuation to 2.18 price-book (P/B) ratio. Market watchers widely expect Yue Xiu to pay about 2.3 P/B for the takeover.

The threat to the smaller, family-owned banks has been increasing
Grace Wu, Daiwa Securities

In comparison, China Merchants Bank, the sixth-largest mainland bank by assets, paid a 2.9 P/B ratio in 2007 to make a major investment in Hong Kong's Wing Lung Bank, which was fully acquired by China Merchants in 2009.

Industrial and Commercial Bank of China, one of the state-owned Big Four banks on the mainland, paid a 2.14 P/B ratio in 2010 to privatise its Hong Kong unit ICBC (Asia).

The 2007 Merchants-Wing Lung deal was considered overpriced by some bankers at that time but senior executives at China Merchants Bank have repeatedly said it was worth acquiring as it allowed China Merchants access to many of the city's wealthy clients.

Other banks are now looking to buy Wing Hang, including Agricultural Bank of China, Singapore's Oversea-Chinese Banking Corp and United Overseas Bank.

Some analysts believe Yue Xiu can copy the success of China Merchants in Hong Kong as small family-owned banks in the city face increased competition and even struggle to survive.

"The threat to the smaller, family-owned banks has been increasing as mainland-backed banks are gaining a foothold in Hong Kong," said Daiwa Securities analyst Grace Wu. "In addition, with the increased requirements in terms of regulation and operations, they are quite eager to cash-in and exit."

Wu said given the current competitive market environment in Hong Kong, the owners of Chong Hing would prefer a much stronger parent company with a mainland background.

"In the long run, the business growth of Hong Kong banks will be highly driven by cross-border business flow," said Wu.

Yue Xiu and Chong Hing declined to comment on the deal.

Hong Kong banks do not impress all potential foreign investors. Australian bank ANZ has been looking to buy a local bank in Hong Kong for the past few years, but more recently its CEO Michael Smith said all targets for a takeover were "overpriced".

ANZ paid just 1.1 times P/B to buy businesses previously owned by Royal Bank of Scotland in some Asian countries in 2009. Analysts said the price buyers would be willing to pay would be lower than the pre-2008 financial crisis level because profitability of the banking sector has dropped sharply since then.