Citi expects more HK bank M&A

Citigroup''s head of FIG, Noel Kullavanijaya discusses the prospects for HK bank M&A after the IBA sale.

With the sale of IBA to Taiwan's Fubon - which is expected to close by year end - Hong Kong has had a wave of three bank M&A deals. Many believe this is long overdue, but there is also much consolidation ahead. But will the families that control so many of the banks be willing to sell? We spoke to Citi's FIG head, Noel Kullivanijaya who advised on the Fubon acquisition.

Is this the start of the consolidation of the banking sector, or is it just foreign stakes being sold and thus a bit of an illusion?

Kullivanijaya: The recent spate of transactions with Fortis Bank, IBA and Chekiang First is certainly getting people to look at Hong Kong banks again, including foreigners and domestic players. It is not clear, however, that valuation has come ultimately in line with what people want. The capacity to pay is still pretty good. The willingness to sell is still in question.

It's been quiet for two years, but by virtue of people talking again, chances are some deals will happen. What I find particularly interesting - although it didn't drive the IBA deal - is CEPA. The CEPA arrangement, as well as the realization that you have to have a good legal infrastructure to do financial services, has led people to conclude that having a platform in Hong Kong is actually a pretty good thing. What this means is that foreign buyers should be more interested in looking at Hong Kong again.

There was a period of couple of years when foreign banks just said the Hong Kong economy is poor and if you are going to do business in China, why not go direct to Shanghai. But that has changed. You can't own a controlling interest in China. You can own 24.9% - that's the maximum today. And then, in spite of the challenges the Hong Kong banks face, banks here are still making money. It may not be a 20% return, but it's a 14% return and that's still pretty good.

Hong Kong has become interesting again, and offshore buyers are looking at it again.

Has CEPA been beneficial for these banks?

I hope so. It makes the path into China clearer. It got announced several weeks before the final IBA deal got announced - although the IBA deal had been in the works some time before that.

Hong Kong banks have always known you have to have scale to be taken seriously in China. And CEPA makes things clear. If you have US$6 billion of assets, you have the right to do something in China. So it's a positive [for the banks].

Should that drive consolidation?

It should if they want to get scale. But the banking business in Hong Kong is very local, and the people that own them tend to be community figures. On top of which, if you are running a bank and you are making money, what's the motivation to sell? The HKMA has been pretty relaxed about not pushing the banks around and allow free-market forces to work. And as I said earlier, CEPA in and of itself is not likely to compel people to merge. Will it help and do we put it in our pitches? Absolutely. But I don't sense people are saying "we gotta merge so we can get bigger and go to China".

There is considerable talk now of Hong Kong property prices going up. Will this also lead the family owners to conclude now is not a good time to sell?

People watched the last spate of deals that was capped with the Dao Heng sale to DBS and that set a higher watermark in terms of pricing. The family owners now say that if prices hit that level again they might sell, but we haven't seen that level in two and a half years. The deals we have seen are being done at 1.2 or 1.3 times book value. That's reasonable but not sufficiently attractive for a family owner to say let's retire.

What was the genesis of the Fubon/IBA deal?

It's pretty much a steady progression towards becoming a regional financial player. They have done their big bank deal - Taipei Bank - and the consolidation trend will still continue in Taipei. The next logical place for Fubon to expand would be where the [Taiwanese] business community trade flows go. And if you look at where trade flows go directly, they route through Hong Kong to China.

With that framework, buying a bank in Hong Kong allows them to capture that trade flow. That's really their prime motivation.

Plus IBA is a digestible size and is something they can build on.

Is there a private banking angle here?

IBA has a small retail banking business, a proportionately bigger SME business, and some corporate business. The corporate business is where trade flows really happen.

One synergy is that whatever correspondent banking relationships Fubon and Taipei Bank had in Hong Kong, can now be channeled through IBA.

They are going through a strategy review at present. But if one were to tick off a list of business opportunities, I would put private banking as one of them. There are thousands of Taiwanese businessmen in Shanghai and they come through Hong Kong on the way back to Taipei.

When did discussions first start?

Discussions started late last year. In February this year, there was a Guoco Group filing with Bank Negara Malaysia stating their interest in IBA.

Fubon had been part of on-and-off discussions. We, in fact, had a transaction substantially talked through right before SARS came along. Things then went quiet and really resumed only six weeks before the deal was finally announced.

What was the seller's motivation?

As I understood it, Arab Banking Corporation is in the process of redeploying its holdings around the globe back into the middle east. This investment had become less strategic for them for several years. I believe it is the last remaining piece in East Asia and in Autumn 2002 they determined they wanted to sell.

Are the remaining Hong Kong banks mostly family-owned?

To my knowledge. There are a couple of foreign bank stakes floating around. But none of them are controlling stakes. The three foreign controlling interests - in Chekiang, IBA and Fortis - are the ones that have been sold.

Who do you think are the potential consolidators?

The top four or five banks have 65% of the market. The next group of guys have $10-20 billion of assets and then there is a bunch of smaller guys.

The second group will be buying share. A good example is Wing Hang Bank, which bought Chekiang First and movedto seventh biggest (4th among listed banks). I suspect we'll see more deals like that. Wing Hang is on the record saying there's more to come.

Others who might be considered as consolidators would be Bank of East Asia, Dah Sing, and Wing Lung. These are banks with $1-2 billion market capitalizations. Among the really big guys like Standard Chartered, Hang Seng, could they do something, possibly.


The answer is possibly. They've done three deals and finally integrated the brand. I suspect they'll consolidate and sit tight for a little bit.

There is also a debate you have to have as the owner of a bank as to where do you hit diminishing returns through too many branches.

In conclusion, you don't think we'll see any more deals for a while?

We may see one or two, but we're not going to see a glut of say, five deals. It will be more of a steady trickle of deals every six months.

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