NewBEA gains 3pc on plan to sell shares to Sumitomo Mitsui

Bank of East Asia shares advanced more than 3 per cent in morning trading yesterday after the lender said late on Friday that it planned to sell 222 million shares to Japan's Sumitomo Mitsui Banking Corp.

The stock pruned its gains and finished the day up 0.15 per cent at HK$33.40 while the Hang Seng Index fell 0.2 per cent. The two banks have entered into a non-binding memorandum of understanding, which is subject to regulatory approval, BEA said in a filing to the Hong Kong stock exchange.

The placement was likely meant to shore up capital after the Hong Kong Monetary Authority hinted earlier this year that it could raise capital adequacy ratios, said Edmond Law, an analyst at UOB Kay Hian Research in Hong Kong.

The potential deal worth about HK$7.4 billion would boost the Japanese bank's stake in BEA from 9.6 per cent to 17.5 per cent, according to a calculation from Barclays. The new issuance of equity would likely dilute earnings per share in 2015 and 2016 and could have a slight negative impact on BEA's share price, Barclays noted.

"While we expect the proposed transaction to strengthen BEA's capital base, it is unlikely to materially affect the bank's business strategy," Standard & Poor's said in a note yesterday.

Rumours have circulated over the past few years that Quek Leng Chan, the chairman of Malaysia's Guoco Group, had been buying shares with the possible intention of a takeover. However, the threat of a hostile takeover could be overblown.