Hong Kong Bank Sales Seen Near 2008 Valuations: Real M&A

Some of Hong Kong’s last family-owned banks may finally be willing to sell as potential takeover valuations approach levels last seen before the height of the financial crisis.

Before today, Wing Hang Bank Ltd. surged 42 percent after saying last week shareholders are in talks to sell, while Chong Hing Bank Ltd. rose 55 percent since disclosing last month approaches from suitors. Having recovered all their market value lost since the crisis, the banks are now offering buyers entry into an international hub for trade in China’s currency.

Wing Hang, more profitable than Chong Hing, may fetch as much as 3 times its book value, said Mizuho Financial Group Inc. and BNP Paribas SA. That equates to a price tag of $7.9 billion, 68 percent more than the lender’s market value last week. No corporate bank takeover in the developed world has obtained such a multiple in more than five years, according to data compiled by Bloomberg.

“This is scarcity premium -- there are only a few mid-sized Hong Kong banks available,” Frank Yuen, an analyst in the city at BNP, said in a phone interview. “Buyers are eyeing the banking license in Hong Kong. They are looking for growth opportunities in the offshore yuan business and cross-border trade flows.”

Today, Wing Hang fell 0.4 percent to HK$118.40, while Chong Hing dropped 3.9 percent to HK$33.45. The benchmark Hang Seng index lost 0.6 percent.

Cherry Yung, a spokeswoman at Wing Hang, and Edith Chan, a spokeswoman for Chong Hing, declined to comment on potential takeover valuations.

Takeover Speculation

Wing Hang, founded in 1937 as a moneychanger in Guangzhou, and Chong Hing, founded in 1948, are among the four remaining family-owned banks in Hong Kong. Both generate most of their income from traditional services such as loans, mortgages and credit cards, their latest annual reports show.

Wing Hang had a market value last week of HK$36.6 billion ($4.7 billion), while Chong Hing was valued at $2 billion.

Takeover speculation has mounted since November, when Chong Hing named its first chief executive officer from outside the Liu family, which controls about 60 percent of the lender. Chong Hing’s share price has since more than doubled. In March, the bank said it was open to bids.

“This opened the floodgates,” Jim Antos, a Hong Kong-based analyst at Mizuho, said in an e-mail. “The Liu family may have done a great favor to the banking sector by deciding it’s time to sell.”

Yuan Center

Hong Kong’s banks are attracting suitors as the city’s role as the largest offshore yuan center draws companies seeking financing. Outstanding yuan-denominated loans in Hong Kong surged to 113 billion yuan in July from 1.8 billion yuan in 2010, the Hong Kong Monetary Authority said.

The “offshore yuan business offers good growth opportunity to Hong Kong banks,” Kathy Xu, a Hong Kong-based investment manager at Aberdeen Asset Management Plc, said in a phone interview. Aberdeen oversees about $318 billion of assets worldwide.

Wing Hang said Sept. 16 that shareholders including the family of Chairman Patrick Fung were in talks for a sale that would trigger a mandatory buyout offer.

The Oriental Daily reported that China Life Insurance Co. was a possible bidder. Wing Hang may appeal to Beijing-based China Life, the nation’s largest insurer, because it offers access to the offshore yuan market, as well as trade finance and bond sales, said Antos at Mizuho.

Overseas Expansion

“China has been encouraging companies in the country to expand overseas,” Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., said in a phone interview. “As Chinese financial institutions have grown large enough for overseas expansion, it’s normal to see them getting a Hong Kong bank as a stepping stone.”

A call to China Life’s press office was unanswered last week during a holiday in Hong Kong.

A Chinese insurer could target Wing Hang’s customers and, indirectly, tap mainland China’s banking market, Edmond Law, an analyst at UOB Kay Hian Holdings Ltd., said in a phone interview.

According to Sanford C. Bernstein & Co., China Life would gain little from a takeover of a small Hong Kong bank. There are few cost savings, and the scope to sell insurance to bank customers is “far from convincing,” Bernstein analysts, led by Linda Sun-Mattison in Hong Kong, wrote in a Sept. 18 report.

Price Gap

All the same, takeover interest from outside the banking industry has raised the probability of the lenders fetching prices that meet the demands of the controlling families, said Yuen, the analyst at BNP.

“Buyers in the past were usually banks and were not willing to pay a high price,” he said. “The emergence of a non-bank buyer bridges the price gap.”

Wing Hang, which has more branches in Macau and China than Chong Hing, should command a higher valuation than its rival, Grace Wu, a Hong Kong-based analyst at Daiwa Capital Markets, wrote in a Sept. 17 report.

Based on the average of six analysts’ estimates compiled by Bloomberg, Wing Hang may sell for 2.5 times its book value. Mizuho estimated the bank would sell for 2 to 3 times book, while BNP put the multiple at 2.5 to 3. Wu at Daiwa estimated it would sell at the upper end of a range of 2.5 to 3.3 times.

Before Lehman

The last time an acquisition of a bank in the developed world was announced at close to that level was before the collapse of Lehman Brothers Holdings Inc. in September 2008, according to data compiled by Bloomberg. That year, China Merchants Bank Co. beat out Australia & New Zealand Banking Group Ltd. to buy Wing Lung Bank Ltd., valuing the family-run Hong Kong bank at about 3 times book value.

ANZ Bank CEO Michael Smith has described the price paid for Wing Lung as “crazy.” It’s difficult to see anyone paying such a multiple for a Hong Kong bank in the post-crisis era, said Law, the UOB analyst.

Since March 2009 when equity markets bottomed, the median book value multiple for bank purchases of more than $1 billion in developed markets has been 1.1, excluding government takeovers, the data show. Wing Hong traded last week at 1.8 times.

Only a bank generating a return on equity of 20 percent could demand a price-book multiple of 3, said Ismael Pili, head of Asia bank research at Macquarie Group Ltd. in Hong Kong. In 2012, Wing Hang’s return on equity -- a measure of how well it reinvests earnings -- was less than half of the 20 percent it reported in 2007.

Yue Xiu

After inviting bids in March, Chong Hing on Aug. 7 said potential buyers had approached the bank. Last week, Chong Hing said it’s still in discussions with interested parties including Yue Xiu Group, the trading arm of the Guangzhou city government.

Yue Xiu is the frontrunner for the Liu family’s controlling stake in Chong Hing, the Oriental Daily reported Sept. 16. The bank might help Yue Xiu obtain financing for business development, said UOB’s Law.

Yue Xiu’s press office didn’t answer a call for comment.

Chong Hing may sell for 2.2 times its book value, according to the average of five analysts’ estimates compiled by Bloomberg that ranged from 2 to 3. Last week the bank traded for 2 times book value.

Faced with tighter capital constraints and rising compliance costs, Hong Kong’s banking families may have decided there’s limited room for growth, said Wan at Pride Investments, which oversees about $300 million of assets.

“If the price is right, why not exit?‘‘ said Yuen, the analyst at BNP. ‘‘As there are limited banks for sale, buyers may think that they can either buy or never have it.’’

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