Bank of America Asia was founded in 1912 as Bank of Canton and today encompasses 14 branches in Hong Kong and 3 branches in Macau. About two thirds of its revenue is derived from its personal banking business. Kenneth D Lewis, Bank of America chairman and chief executive officer commented: "while Bank of America will continue to invest in and build out our wholesale banking businesses in Asia, this sale reflects Bank of America's philosophy of having significant market share or presence where we choose to do business. Bank of America (Asia) is 17th in assets in Hong Kong, a local market dominated by a few top players. After an extensive review, we concluded that we did not have the economies of scale to remain competitive."
The consideration represents a book value multiple of 1.32 times net assets of Bank of America Asia which stand at HK$7.4 billion as on December 31, 2005. Total assets on the same date stand at HK$49.07 billion. On an earnings multiple basis the price represents 18.1 times calendar 2005 profit of HK$537 million.
The most recent transaction in the banking sector in Hong Kong was the acquisition by Malaysia's Public Bank of Asia Commercial Bank in February this year. Public Bank paid HK$4.5 billion, representing 2.5 times book value for 12 branches in Hong Kong, a branch in Shenzhen and representative offices in Shanghai, Shenyang and Taipei. A key value driver cited for Asia Commercial Bank was the approval it already had, at the time, to expand its branch network in China. CCB was one of the bidders for Asia Commercial Bank. After losing to Public Bank CCB had reiterated its interest in closing an acquisition to strengthen its position in Hong Kong.
On an adjusted book value basis - based on Bank of America Asia's 12.5% core capital adequacy ratio plus dollar-for-dollar on the capital above 12.5% - the price actually represents a 1.75 times book value multiple. For 2005 Bank of America Asia had a capital adequacy ratio of 28.4% compared to 15.6% across a cross section of 10 comparable banks. The all-cash consideration paid by CCB will be internally funded. Through the acquisition CCB expects to double the scale of its business in Hong Kong with its customer loan book moving up from current rank of 16th position to 9th position and its estimated market share of total assets doubling from current 0.7% to 1.4%. CCB expects the transaction to be earnings accretive immediately and disclosed that 2006 Bank of America Asia earnings will accrue entirely to CCB. CCB will rebrand Bank of America Asia branches.
The acquisition, which is subject to various approvals, is expected to be completed by year end. CCB termed the transaction ôa unique acquisition opportunityö due to the chance to acquire 100% control. There is also the fact that both banks are strategic partners which they say will facilitate a smooth transition.
In June 2005 Bank of America agreed to acquire a 9% stake in CCB for $3 billion. This was achieved via a combination of secondary sell down by China SAFE Investments for $2.5 billion and a purchase of $500 million during the CCB IPO. Bank of America also secured the right to bring its aggregate ownership up to 19.9% over the next five and a half years. Bank of America currently holds 8.52% of its share capital.
News that CCB was interested in Bank of America Asia has been in the market for a few weeks. It has also been speculated that this transaction was agreed to at the time Bank of America acquired the 9% stake in CCB.
International banks are increasingly trying to get their strategies right in Asia as the region is widely considered critical to future growth. Standard Chartered Bank, which derives the majority of its profits from Asia, has followed an acquisition led growth strategy and recently announced a $413 million acquisition in Pakistan. For Bank of America the strategy is to back the bigger horse namely, CCB, rather then deploying capital towards trying to enhance its own Hong Kong-Macau franchise. Bank of America closed its only retail branch in China in December.
Bank of America (which was advised by Banc of America Securities and HSBC on the acquisition of 9% in CCB) did not have external advisors on this transaction. CCB was advised by Morgan Stanley and China International Capital Corporation.