Nanyang Commercial Bank’s HK$68 billion asking price a bid for state buyers

PUBLISHED : Wednesday, 15 July, 2015, 9:46am
UPDATED : Wednesday, 15 July, 2015, 11:54pm

Bank of China (Hong Kong) opened the bidding for Nanyang Commercial Bank (NCB) at HK$68 billion on Wednesday but the higher-than-expected asking price, coupled with deteriorating asset quality on the mainland, could keep all but state-backed buyers away, analysts said.

BOC Hong Kong said in a notice at the Beijing Financial Assets Exchange that it would sell 100 per cent of its wholly owned subsidiary, which has 40 branches in Hong Kong and 42 branches and sub-branches on the mainland.

BOC Hong Kong will accept bids on the bank, which also owns a locally incorporated subsidiary on the mainland, until August 25.

Considering the extent of bad loans at NCB, this seems a bit rich
Jim Antos, Mizuho Securities Asia

If NCB sold for HK$68 billion, it would be the largest bank deal in Hong Kong and tower over buyouts in recent years, such as OCBC’s HK$38.4 billion purchase of Wing Hang Bank in July last year, which was the biggest bank deal in more than 10 years.

About half of Nanyang’s loans last year were booked on the mainland, raising questions over its asset quality as the mainland banking sector continues to experience a strong uptick in non-performing loans.

At the end of June last year, NCB had a non-performing loan ratio of 0.73 per cent, up 39 basis points in six months, according to BOC Hong Kong.

“Considering the extent of bad loans at NCB, this [asking price] seems a bit rich,” Mizuho Securities Asia banking analyst Jim Antos said. “However as this deal will most likely involve only mainland parties, this expensive valuation might very well be reached, which would be very positive for BOC Hong Kong shares.”

The announcement of the asking price on Wednesday drove BOC Hong Kong shares up by 2.6 per cent to HK$31.40.

Potential shortlisted buyers included New China Life Insurance, Yue Xiu Group and China Taiping Insurance, Reuters has reported, citing unnamed sources.

China Cinda Asset Management was also rumoured earlier this year to be an interested party but the bad-debt manager has denied that it has engaged in any negotiations on the deal.

The deal was likely to attract non-bank financial institutions on the mainland as many mainland banks already had presences in Hong Kong, Ismael Pili, head of financials research at Macquarie Securities in Asia, said, while agreeing that the banking sector’s bad-debt problems could keep out non-state players.

“The appeal of NCB could be affected by asset quality woes besetting the sector,” he said. “To get the auction off, state-owned or -backed companies may either have greater interest or be tapped to submit a bid.”

The disposal of the bank, which was formally announced by Bank of China and BOC Hong Kong in late May, was received warmly by analysts and investors, who saw the subsidiary as an overlap of Bank of China’s commercial business on the mainland.

May’s announcement coincided with a restructuring plan that would transform BOC Hong Kong into the Southeast Asian arm of its parent.

At the end of last year, NCB constituted about 14 per cent of BOC Hong Kong’s total assets. The sale was expected to enhance BOC Hong Kong’s capitalisation but Fitch noted in May that the improvement could be offset as Bank of China consolidates its assets in Southeast Asia.

Moody’s Investors Service downgraded NCB’s rating outlook to negative in May on the back of the announcement.

 “In our opinion, Nanyang Commercial Bank is unlikely to benefit from as much support as it currently enjoys as a wholly owned subsidiary of Bank of China (Hong Kong),” it said.