Chong Hing Bank raises capital for mainland push

Hong Kong-based Chong Hing Bank launches rights issue as its parent seeks to turn it into a major financial services provider in Guangdong province.

Hong Kong-listed lender Chong Hing Bank launched a HK$3.71 billion ($478 million) rights issue on Monday in a bid to finance expansion on the mainland and bolster its capital base.

The deal, which represents 50% of the bank’s issued share capital, leaves existing shareholders facing heavy dilution, but potentially benefitting from considerable upside if the bank can successfully leverage its parent’s connections to push further into Guangdong Province.

In February 2014, Chong Hing began to transform itself from being a small family-owned Hong Kong-based bank after Yuexiu Financial Holdings purchased a 75% stake for $1.5 billion in a deal valued at 2.08 times book value.

The Yuexiu group is Guangzhou’s largest state-owned enterprise by assets and has made no secret of its desire to turn itself into a leading financial services provider. Chong Hing currently has 47 branches in Hong Kong and one each in Shantou and Macau, with sub-branches in Guangzhou and Foshan. 

One source close to the deal said Chong Hing plans to add footprints in cities where Yuexiu already has a strong presence and will mainly do so through organic growth rather than M&A. However, this may all change if its parent is successful in bidding for Nanyang Commercial Bank, which Bank of China Hong Kong is offloading at a minimum price of HK$68 billion ($8.8 billion).

Heavy dilution

Existing Chong Hing Bank shareholders are being offered one share for every two shares held.

This level of dilution is much higher than local rival Dah Sing Bank presented shareholders with last May when it raised HK$1.2 billion ($152 million) from a rights issue. This was priced at a 33.3% discount to the stock’s spot close, entailing 12% dilution.

In a filing with the Hong Kong Stock Exchange, Chong Hing said it is selling 217.5 million shares at HK$17.05 a piece. This represents a 26.03% discount to the stock's HK$23.05 last close and a 19% discount to the theoretical ex-rights price of HK$21.05.

Yuexiu will subscribe to all its entitled rights, which means the deal is, in many respects, a capital injection. Subscribers to the new rights shares will not be entitled to the HK$0.21 interim dividend.

The shares were suspended on Monday, but will resume trading again on Tuesday and will trade on an ex-rights basis from August 21.

At HK$23.05, Chong Hing is currently valued at 0.93 times price-to-book and 9.5 times price-to-earnings on a trailing 12-month basis.

Its share price has risen sharply since a recent low of HK$18.16 on July 8. Since then it has climbed 26.95% to Monday’s close and is up 36.72% year-to-date.

Tighter capital requirements

The bank is raising capital at a time when global financial regulators are pushing all banks to strengthen their capital bases.

Chong Hing saw its own overall capital adequacy ratio drop from 15.94% at the end of December to 14.14% at the end of June. Its tier 1 ratio also fell from 12.77% to 11.5% over the same period, while its common equity tier 1 (CET1) ratio dropped to 8.65% from 9.6%.

Its overall ratio stands some way above the current statutory 9.5% minimum under the new Basel III capital requirements and 11.5% minimum required by 2018. But analysts say Chong Hing needs a sizeable buffer in case the Hong Kong Monetary Authority imposes additional requirements.

The rights issue marks the lender’s first attempt to strengthen its capital base since September last year, when it raised $300 million from a 6.5% Additional Tier 1 bond.

Elsewhere across Greater China, many regional and local lenders have already replenished their capital bases.

In February, Hang Seng Bank raised Rmb12.73 billion ($2 billion) after selling a 5% stake in Industrial Bank. This improved its total capital ratio by 3.8 percentage points and CET1 and tier 1 ratios by 2.3 percentage points.

A month later, Bank of East Asia raised $955 million from a private share placement to Japan’s Sumitomo Mitsui.

Meanwhile Barclays’ analysts believe the sale of Nanyang Commercial Bank could boost Bank of China Hong Kong’s capital adequacy ratio to more than 18%.

Chong Hing rights issue will be fully underwritten by BOC International, DBS and Nomura.

¬ Haymarket Media Limited. All rights reserved.
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