HKCB next acquisition opportunity

Banking sector consolidation picks up pace with HKCB tipped the next likely target.

StockHouse LogoFirst Pacific Co [142] looks set to conclude the disposal of its stake in FPB Bank [717] any day. This would follow ICBC's takeover of Union Bank in April of this year. Analysts predict that the consolidation of the local banking industry will continue and tip HKCB Bank [655] as the next likely target.

Stockhouse HKCB picThe speculation has arisen due to the situations of HKCB Bank's two major shareholders, China Resources [291] and Lippo China Resources [156]. They hold stakes of 35.4% and 30.0% respectively.

“Both companies have their own reasons for selling their stakes in HKCB Bank,” says Anthony Lok, regional head of banking at Nomura International.

Lippo China Resources, which has been under tremendous financial pressure, had attempted to sell its stake in HKCB in 1998. China Resources, on the other hand, is undergoing a restructuring programme and is disposing of its non-core assets. Mr Lok points out that HKCB is currently undervalued and this situation would be attractive to potential buyers.

Lippo Group, the parent of Lippo China Resources, is an Indonesian company founded by James Raidy. Lippo Group's business scope includes securities trading, investment and property. The Group was hard hit by the Asian financial crisis and, as asset prices plummeted, has found itself in urgent need of capital. A previous attempt to sell its stake in HKCB Bank to China Resources in 1998 was unsuccessful as a price could not be agreed. Things could be different this time around.

As for China Resources, it is restructuring and will focus on its distribution and logistics businesses in the future. As banking does not fall into the Company’s future business direction, banking sources confirm that it would also be looking to dispose of its stake in HKCB. China Resources Chairman Ning Gaoning has declined to comment on the issue.

A possible suitor could be the Development Bank of Singapore [SI.DBSM]. A market rumour making the rounds has DBS proposing HK$4.40 ($0.56) per HKCB Bank share for Lippo China Resources’ stake. That price would represent a 132% premium on Monday’s closing price and would follow DBS’ acquisition of Kwong On Bank.

DBS is already 12th in terms of loans and 11th in terms of deposits in Asia and has ambitions to become a top five Asian bank. Management has hinted that it is not interested in expanding in Singapore where is already has a strong presence. It would like to diversify its earnings base, de-concentrate its operations and have a credit profile that reflects emerging Asia so that there is better business balance. The Bank has already indicated that Hong Kong is a very profitable place to operate and is also the gateway to China with a potentially large market in South China itself.

Credit Lyonnais Securities believes that mainland banks, including the China Construction Bank and the Agricultural Bank of China, would also be interested in gaining a foothold in Hong Kong through an acquisition of a stake in HKCB.

The share price of HKCB Bank closed Monday trading at HK$1.85, equal to a Price to Book Value Per Share of only 0.65 times. A Price to Book Value Per Share of 1.39 times for HKCB, the valuation paid by ICBC for Union Bank, would equal HK$4.00 per share.

Sun Hung Kai Securities has a "Buy" rating on HKCB Bank. It cites the Bank’s 35% share price discount to its estimated NAV per share and the Bank's improved earnings outlook as the main reasons for its recommendation.

Salomon Smith Barney predicts a merger and acquisition wave among Asian banks over the coming twelve months. Among Hong Kong banks, it picks Wing Hang Bank [302], Dah Sing Financial [440] and HKCB Bank as the preferred M&A plays. The US investment house adds that no Asian banks, however large, are immune from being an acquisition target in the current climate of increased globalisation.

Copyright: StockHouse Media Corporation

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