Shareholders in Bank of East Asia (BEA) may be disappointed that Japanese megabank SMFG plans to raise its stake to 17.5% as analysts say the move makes a takeover approach even less likely and dilutes existing shareholders.
SMBC, the core lending unit of SMFG, will acquire 222 million new shares in BEA through a private placement, equivalent to 8.7% of the enlarged share capital.
“We believe the growing presence of a large strategic investor reduces the likelihood of any corporate action in the near term,” said Barclays analysts in a research report.
The blow comes at a time of heightened worries about the Hong Kong banking system's exposure to rising bad debts on the mainland and shrinking margins at home.
After subscribing to the new shares, SMBC’s stake in BEA would rise to 17.5% from 9.6%; making the Japanese bank BEA’s largest shareholder, overtaking Spain’s Caixabank.
Investors in Hong Kong’s shrinking number of family-run banks had become excited about the prospect of takeover offers after the owners Wing Hang and Chong Hing sold out. To be sure a change of control at BEA has always been a long shot.
“Given the good relationship between SMBC and Li family, higher holdings by SMBC should further strengthen the existing management’s control on BEA,” noted JP Morgan banking analysts. SMBC has been an investor in BEA since November 2008.
Barclays estimates that the new share issue would dilute BEA’s 2015 EPS by 8% but boost its CET1 by 140bps to 12.5%.
“My colleagues and I welcome SMBC’s decision to increase its investment in BEA, which will further strengthen our bank’s core capital. We greatly value the relationship
that we have shared with SMBC for over 40 years, and we look forward to forging even closer ties with SMBC wherever possible,” said David Li, chairman and chief executive of BEA, in a statement.
The private placement will result in nearly 9% dilution to other existing shareholders. The holdings at CaixaBank and Guoco will be diluted to 15.6% and 13.7% from 17.1% and 15.0% respectively, noted analysts at JP Morgan.
A silver lining could be that other major shareholders, such as Guoco, respond by raising their stakes in the open market.
The future looks tough for Hong Kong banks as they continue to lose loan market share to large mainland Chinese banks and margin pressure has resumed after a brief respite last year.
Mainland Chinese banks have been expanding aggressively in the financial hub since around 2000 and their share of Hong Kong deposits is under pressure. HSBC, Standard Chartered and Hang Seng Bank and Bank of China HK hold about 53% of Hong Kong deposits.
Investors are also worried about the heightened risk on mainland asset quality and the prospects for lower payouts. Hong Kong banks’ first-half reporting season underscored these trends
Macquarie analysts recently put BEA on its sell list given its relatively higher asset quality risk from its bigger China exposure.
Hong Kong banks are also increasingly sensitive to renminbi depreciation. Trade finance is heavily exploited by mainland borrowers as a way to access low-cost US dollar funding and arbitrage differences in currency and interest rates.
The Hong Kong Monetary Authority (HKMA) is looking further into how the lenders are exposed to China because the city’s bank are lending increasingly to mainland companies.
Hong Kong banks lent a total of HK$2.867 trillion ($370 billion), including trade finance, to mainland companies during the first quarter, according to a June report by the HKMA.
The figure means Hong Kong banks were 10.8% more exposed to the mainland in the first quarter, compared to end-2013’s HK$2.59 trillion. Last year, the banks’ mainland exposure grew 29% and accounted for 20% of their total assets at end-2013 versus 16% at end-2012.
For the first time in its quarterly report, the HKMA disclosed a detailed breakdown of China-related lending, highlighting how the authority is closely monitoring the cross-border lending market.
According to the report, China’s private sector borrowed 8.2% more than the year before and the public or state-owned entities 12.6% more; trade finance increased 30% while bank loans rose 8.1%.