Banking M&A about to rocket...again

Mergers and acquisitions among Hong Kong and Singapore banks could be just around the corner.

A recent research report by Raymond Lee, head of regional financial institution research at Salomon Smith Barney, is predicting that there will be a wave of mergers and acquisitions (M&A) among the Hong Kong and Singapore banking communities. The pressure of market liberalization and the subsequent profit stress will force the banks from the two cities to merge among each other or seek acquisitions from third parties.

In Hong Kong, Mr Lee says that the city is over-banked. And as the deposit interest rate ceiling is being phased out, so the smaller banks will come under pressure to merge or sell out as their valuations become depressed. A further fillip to the Hong Kong banking M&A boom will come from mainland banks who are looking to acquire an offshore footprint by buying banks in the SAR. Such a deal occurred earler in the year when ICBC - one of the four largest Chinese banking groups - bought Hong Kong's Union Bank.

In Singapore the situation is somewhat different. The banks there have cash to burn and there is no need for them to deepen their presence at home. Therefore they are looking overseas at acquisition opportunities. However, given their relative size and sophistication, Singapore banks themselves could be attractive acquisition targets by larger multinational banking groups seeking an Asian expansion.

What Mr Lee is saying is nothing new. Hong Kong has been over-banked for ages but no mergers have really happened. There have been only two deals - the Union/ICBC deal and DBS's purchase of Fuji's interest in Kwong On Bank, as well as Standard Chartered's purchase of Chase Manhattan's credit card business. Singapore's banks have resolutely refused to merge with each other since the 1997 merger of Keppel Bank and Tat Lee Bank, despite this being the express wish of the MAS chairman, deputy prime minister and number one son Lee Hsien Loong. (The DBS purchase of Posbank was essentially a government manoeuvre).

What Mr Lee perhaps overlooks are the intangibles and the incalculables that defy modern securities analysis. These factors are usually the key reasons why mergers and acquisitions take place or not. Most of Hong Kong's smaller banks are still controlled by the founding families. A great deal of natural pride is wrapped up in the ownership of these institutions. Selling them is literally selling the family silver.

Only the very prospect of ruin would force any of these families to cede control of the businesses they have nurtured and grown through thick and thin. It would take much more than short term profit pressure, or the sporadic interest of a bigger rival to force these owners to sell their banks.

In Singapore, the banks have chosen to embark on a wholesale asset diposal programme rather than be forced into bed with each other. Natural rivalry means that they just could not work together if they did merge.

So while the theory is true, in practice it has not happened. This perhaps begs the question of why Mr Lee wrote his report. Perhaps there are a string of deals in the background just about to emerge. We dont know. But clues lie in what Mr Lee was doing when I called him. "Im sorry, but Raymond is away on a marketing trip." A-ha.

Perhaps the research should have said: 'By all logcal reasons there should be an M&A boom among the region's banks. And if there is, we want to get a piece of the action.' I wish Mr Lee well as he certainly makes a convincing argument. I just hope the banks buy it and the timing at last is right.