Bank of East Asia Targets Costs in China, Defends Board

  • Willing to consider changes to the bank's board if necessary
  • May ``rationalize'' China branch network to help control costs

Bank of East Asia Ltd., the Hong Kong lender targeted by billionaire Paul Singer’s Elliott Management Corp., will take action on a China business that is “dragging down our overall performance” and could consider changes to the bank’s board, its deputy chief executive officer said.

The lender may “rationalize” its branch network in China and take other steps to control costs and deal with problem loans on the mainland, said Brian Li, 40, a scion of the Li family dynasty. He also defended the independence of the lender’s board, which was criticized by a Hong Kong court in a judgment earlier this year.

“We are looking at a number of things to improve the business performance,” Li said in an interview earlier this week. “Of course, China is one big focus because at the moment China is dragging down our overall performance.”

Hong Kong’s largest independent lender is trading below book value for the first time since the 2008 financial crisis, and its board is being challenged by Singer’s activist hedge fund. Elliott’s stake now stands at 5.12 percent, worth about HK$3.6 billion ($460 million) after the fund bought additional shares in August.

Bank of East Asia is trading at a lower valuation than its major Hong Kong-listed competitors, and at half the price-to-book ratio that a Chinese buyer offered recently for BEA rival Nanyang Commercial Bank Ltd.

China Slows

With the China economy cooling and some mainland companies struggling to repay debts, BEA’s push into China has been a drag on the share price, down 14 percent so far this year. BEA’s nonperforming loans on the mainland jumped to 2.65 percent in June, higher than the 1.5 percent average for China’s banks.

Founded as World War I was ending, Bank of East Asia is one of only two remaining independent banks listed in Hong Kong, together with Dah Sing Banking Group Ltd. Three competitors have announced sales to Chinese and overseas buyers over the past two years.

BEA, chaired by David Li, 76, who has been its chief executive since 1981, has 89 branches in Hong Kong and about 130 outlets in China after boosting its presence since the country’s opening of its banking industry in 2006. Outside Greater China, the bank also has operations in Singapore, New York and London.

Elliott’s Challenge

Elliott hasn’t stated publicly what it intends to do with its stake in BEA, but the Hong Kong court action it launched in January focused on its criticism of the way BEA approved a placement of HK$6.6 billion of its shares with Sumitomo Mitsui Banking Corp. last year.

Elliott’s lawyer argued in court that the placement was against shareholders’ interests and should have been more carefully considered by the board.

High Court judge Jonathan Harris sided with Elliott in his June verdict, ruling that there was “at least a respectable argument that the board failed in its duty” to review the SMBC transaction properly. He also expressed concern about the bank’s governance, noting that the BEA board includes seven members of the Li family and the “higher echelons of Hong Kong’s business establishment with its common community of interest.”

He agreed to Elliott’s request for BEA to hand over documents on the SMBC transaction.

In the interview, Li defended the bank’s board and governance standards, but said that BEA is willing to consider changes.

“I would say that there’s always room for improvement and we would always strive to make improvement if we see there’s a need to,” Li said. “If we feel that there’s a need to alter the board composition, then we will consider it,” he added.

Li, together with his father David and his brother Adrian, are the leading family members on the board.

Board Defended

“People always feel that we run the bank and we can do whatever we want. Honestly, that’s not true,” Li said, explaining that the company is highly regulated by the Hong Kong Monetary Authority and its non-executive directors provide “very valuable views and opinions.”

Li said that BEA had yet to hand over the documents on the SMBC transaction sought by Elliott, but declined to comment in detail on the fund’s legal challenge.

“It’s really in the hands of the lawyers, so I should not really comment on this, but I would say it’s in the process of sorting out,” he said.

Richard Barton, an external spokesman for Elliott, declined to comment.

In China, BEA is now focused on lending to strong state-owned enterprises and big corporations, and on cost control, Li said. “We are looking to rationalize our branch network on mainland China. We will look at the value of each branch,” he said, while expressing confidence in the country’s long-term prospects.

“Banking after all is a cyclical business,” Li said. “It would be unwise to stop everything when you see that the economy is slowing down. What we want to do is to come off of this slowdown stronger than we were before.’

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