BEA could be a victim of fear

Analysts and market observers think the run on Bank of East Asia may be due to the current trouble on Wall Street and fear psychosis.
Is Bank of East Asia a victim of the current fear psychosis and panic created as a result of the turmoil in international money markets? Possibly yes, according to banking analysts and market experts.

The Hong Kong-listed mid-size bank continued to be swarmed by depositors for a second straight day yesterday, with account holders rushing to withdraw their money despite continued assurances from regulators and management that the fifth largest bank in Hong Kong is financially stable. The bank, controlled by David Li, has been under siege from depositors after rumours spread, through text messages, that the bankÆs finances were unstable and it faced financing difficulties.

The run on the bank comes after BEA announced last week that it was revising down its after-tax profit for the first half of this year to HK$821 million ($105.8 million) from HK$930 million following the discovery that an equity-derivatives trader had mistakenly changed the parameters of a transaction.

ôWe are reviewing how it went unnoticed and what can be done to prevent it in the future,ö a BEA spokeswoman says. She went on to say that the rumours have been spread by parties intending to manipulate the bankÆs share price, which lost about 7% in WednesdayÆs trading.

The BEA spokesperson also says the bank is working with the international ratings agencies to keep them updated on the bankÆs financial position.

Last Friday, Moody's Investors Service said in a statement that it has changed to negative from stable the outlook for all of Bank of East Asia's ratings. These include the bank's financial strength rating of C, foreign and local currency long term/short term deposits ratings of A2/P-1, foreign currency subordinated debt rating of A3, and its foreign currency junior subordinated debt rating of A3.

"The negative outlook reflects Moody's further concerns over BEA's internal control and risk management after the bank reported unauthorised manipulation of the valuation of certain equity derivatives in the first half of 2008," says Leo Wah, a Moody's vice-president and senior analyst.

Kevin Chan, a banking analyst at CLSA, said in his morning note to clients yesterday that BEA should be able to ride out this problem easily and he sees no systemic risk for the Hong Kong banking sector.

A second banking analyst at an American securities house says that the corporate clients of BEA have solidly stood behind the bank and the withdrawal of cash was restricted to retail depositors only. BEA has total assets of HK$396 billion. Its exposure to Lehman Brothers and AIG was small at HK$422.8 million and HK$49.9 million respectively, together accounting for just 0.1% of total assets.

Furthermore, since 2006, the Hong Kong Monetary Authority (HKMA), the territoryÆs defacto central bank, has set up a deposit insurance scheme, which will protect depositors for up to HK$100,000. According to the HKMA, the scheme should be able to cover more than 90% of depositors in Hong Kong.

A banker at a mid-tier bank in Hong Kong says the run on BEA had more to do with the knee-jerk reaction of retail depositors in Hong Kong, who have been spooked after reading too much gloomy news emanating from Wall Street, and the subsequent sharp decline in global stockmarkets. ôThey have read how mighty investment banks like Lehman and Merrill Lynch have bitten the dust. So when they read that BEA had been downgraded by a rating agency and start getting text messages, they panicked and rushed to withdraw their meagre savings,ö the banker says.

He says retail investors and depositors in Hong Kong have no appetite for risk taking, especially in times of market turmoil. The property market crash in 1997 and the Asian financial crisis left scores of retail investors in dire straits, who now have no desire to take the slightest risks.

This proves why retail investors did not pay heed, despite assurances from HKMA chief executive Joseph Yam, that BEA was highly capitalised and highly liquid. Hong Kong's financial secretary John Tsang also called the rumours spread by text messages baseless.

Following WednesdayÆs 6.8% drop in BEAÆs share price, the shares rebounded on Thursday to close up 3.8% on reports that property tycoon Li Ka-shing had jumped into the market to support the bank's shares. A person familiar with the situation said Thursday that Li had bought a substantial amount of shares and this was later confirmed by Li to reporters.
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