In what is being proclaimed as the first bank capital deal for a mainland Chinese-owned bank, Citic Ka Wah has successfully launched a $300 million lower tier 2 sub-debt deal.
The deal was upsized from $250 million, while a third of the deal was taken up by Hong Kong accounts, and the rest split between Singaporean and European accounts. Whether or not it should be taken as a surprise, there was very little participation from the US.
Lead managers Barclays Capital, ICBC and UBS Warburg priced the deal at 290bp over five-year treasuries, having gone out to the market with a range of 285-295bp over.
The deal came about 50 basis points wide of Bank of East Asia’s issue, but the latter is rated a notch better by the rating agencies. Nor does it have the baggage of being PRC-owned. Citic Ka Wah is 55% owned by the China Trust & Investment Corporation (Citic).
Likewise,in the market is OCBC’s much larger bank capital deal, although the investor bases for the two credits were described by one as being “chalk and cheese”, and hardly likely to overlap.
While some reckon the pricing came at the right level, one rival banker sniped that it was a tad cheap, although not ridiculously so given it was a debut credit. The presence of ICBC was also questioned – the assumption being that the Chinese bank, which is very close to Citic Beijing, was prepared to buy a large chunk of the deal and put it on its balance sheet for relationship reasons.
UBS Warburg’s head of debt capital markets, Patrick O’Brien says the deal was fairly priced, and that almost all of the non-Hong Kong investors had to put in new credit lines to buy the paper. “This is the first time the management team has been out on a roadshow,” says O’Brien. “And raising $300 million for a bank of Citic Ka Wah’s size is an achievement. The company is very happy.”
The bank’s market capitalization is just under $1 billion.
The big question is less about the minutiae of the deal’s pricing than what will the bank do with the war chest it has raised.
The bank states in its prospectus that it plans to grow by acquisition, and the Hong Kong market is rife with speculation as to which banks will pair off with each other.
Everyone's favoured takeover target is Dah Sing, an excellent bank that trades at 2.2 times book value. However, with a market capitalization of $1.3 billion, it might be slightly out of Citic Ka Wah’s league and more of a target for either a foreign buyer (akin to the DBS Dao Heng deal) or Bank of East Asia.
Most speculation surrounds whether Citic Ka Wah will make a bid for HKCB which has a market capitalization of $628 million and trades at just over one times book, meaning the goodwill element of a bid ought to be muted.
HKCB has $3.2 billion of assets, compared with Citic Ka Wah’s $7.2 billion. According to an HSBC Securities research report, Citic Ka Wah is “the only mid-cap bank in our universe which has a strongly-committed growth strategy.” Citic Ka Wah has been aggressively improving its performance in the last three years but it will have to do something dramatic to break into the big league. A takeover of HKCB would be a start.
Consolidation in the bank market in Hong Kong is being driven by a variety of factors, not least of which is a stagnant mortgage market and falling margins on this product. The local banking system has excess liquidity and is increasingly faced with less profitable lending opportunities, and noone sees the situation reversing. A return to the halcyon days of the 1980s and 1990s when the banks surfed the wave of a property boom is not on the cards.
So everyone knows consolidation is necessary. However, with most banks having few NPLs, none are under any dire pressure to act. The price of 3.3 times book DBS paid for Dao Heng also has the family owners of local banks looking – rather unrealistically – to get a similarly high price.
If Citic Ka Wah makes a bid for HKCB, it is suspected it will do so with a mixture of cash and stock.
