Bank of East Asia Rejects Hedge Fund's Call to Explore Sale

  • Lender cites challenging economic, operating environment
  • BEA posts 17% drop in 2015 profit as China bad loans increase

Bank of East Asia Ltd., the Hong Kong lender targeted by billionaire Paul Singer’s Elliott Management Corp., rejected a call by the hedge-fund firm to consider selling itself even after posting a bigger-than-expected profit drop.

Instead, the bank intends to focus on improving and executing on what it already has, according to a BEA statement filed to the Hong Kong stock exchange on Monday. That includes its China operations, which the lender said are “severely challenged” in a separate statement that outlined a 17 percent decline in full-year profit, higher bad loans on the mainland and a hiring freeze.

“Given the current challenging macroeconomic and operating environment as well as the business initiatives that are under way, now is a poor time to contemplate a sale,” the company said. “The bank will not be conducting an auction process.”

In a letter to fellow shareholders earlier this month, Elliott blamed an “entrenched executive management” for mismanaging BEA and urged the bank to explore a sale “at an appropriate premium.” Previous bids for Hong Kong banks have been priced at an average of two times book value, which for BEA would equal about HK$60 a share, according to the hedge-fund firm, which holds a 7 percent stake in the lender.

BEA shares closed 2.4 percent higher at HK$23.10 on Monday, compared with its 2.9 percent gain as of Hong Kong’s trading break, during which the bank’s statements were released. The stock has slumped 22 percent in the past six months.

In an e-mailed response to BEA’s rejection sent after market hours, Elliott repeated its call for the bank to consider a sale, adding that its view that the board can’t deliver “proper value” to shareholders remained unchanged. An auction process to explore a sale is the only realistic route to “meaningful returns,” the hedge-fund firm said.

“With Elliot pushing BEA to sell itself, well, good luck with that,” said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “Even if a buyer was remotely interested, in the current environment two times book is very punchy.”

Separately, BEA reported a 17 percent decline in 2015 profit to HK$5.52 billion ($709 million), which missed the HK$6.03 billion average estimate of three analysts surveyed by Bloomberg. The bank and NWS Holdings Ltd. also said they’re reviewing their investment in Tricor Holdings Ltd., which may result in a sale of the provider of business and investor services.

Net profit after tax for BEA’s China business tumbled 81 percent in 2015 from a year earlier, according to its earnings statement. Among Hong Kong banks, the lender is the most exposed to China, where economic growth is slowing.

Bad Loans

BEA’s nonperforming-loan ratio in the nation about doubled to 2.63 percent at the end of 2015 from 1.32 percent a year earlier, the company said. That compares with the 1.67 percent average for Chinese lenders at the end of last year, regulatory data released on Monday show.

Asset quality in China improved in the second half of last year, Deputy Chief Executive Officer Brian Li said at a press briefing on Monday, though he couldn’t say whether the worst was over.

“With the slowdown in the mainland economy, risk management is critical,” his father David Li, who is BEA’s chairman and CEO, said in the earnings statement. “BEA China is applying a more conservative approach to lending, and our proactive measures have necessarily resulted in reduced loan volumes and margins.”

The elder Li flagged cost control as “a top priority” because the bank doesn’t expect a “material improvement” in the business environment. It will freeze headcount across the group and will merge some of its sub-branches in mainland China, he said.

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