Japan’s SMBC goes after China market

Megabank targets Chinese clients by upping its stake in Bank of East Asia. The deal looks reasonably priced at about ¥100 billion or about 1.2 times book.

Sumitomo Mitsui Banking Corp. (SMBC) is targeting a toehold in the Chinese market by upping its stake in Bank of East Asia (BEA) for about ¥100 billion ($951 million).

SMBC, the core lending unit of Japanese megabank SMFG, said in a statement on Friday that it has agreed to raise its stake in Hong Kong-listed BEA to about 17.5% from 9.6%.

If approved by regulators, the deal would further SMFG's ambition to become an Asia-centric institution over the next decade. 

All three Japanese megabanks - SMFG, MUFG and Mizuho - are broadening their overseas loan books and are once again the world’s biggest creditors.

The world looks set to become even more reliant on Japanese capital in the coming years. As Prime Minister Shinzo Abe’s economic stimulus package loses steam the banks are redeploying their record profits and ample yen liquidity -- $2 trillion worth of deposits in the first quarter of last year -- into faster-growing economies than their sluggish and over-crowded home market.

Banking analysts dubbed the move by SMBC “forward-looking” and at a reasonable price of about 1.2 times book. They added it would also give a small kicker to SMBC’s consolidated net profit of about 2% for the year ending March 2015.

SMBC has a locally incorporated business in China but no Chinese corporate clients, according to banking analysts. The investment in BEA could give SMBC indirect exposure to a fast-growing market.

Founded in 1918, BEA has 126 branches in mainland China, more than in its home town of Hong Kong - 89 branches as of June 30.

SMBC joins several other foreign banks in expanding their footprint in China, such as HSBC, Citi and, more recently, OCBC after it purchased Wing Hang this year.

Earnings boost

If the equity method were to be applied the deal would also boost SMBC’s return on investment in BEA.

Nomura analyst Ken Takamiya estimated annual equity-method income contributions between ¥10 billion and ¥15 billion a year, based on current profit levels at BEA.

If the equity method is applied, Deutsche Bank analyst Yoshinobu Yamada said, BEA's contribution to SMBC's consolidated net profit would be ¥15.7 billion. On a total investment of ¥191.1 billion, that would mean ROI would rise to 8.2% after tax versus 3.7% from just annual dividends of ¥3.4 billon.

SMBC will subscribe to a third-party allocation of 222 million new shares, according to Friday's statement.

The price of the purchase will be set according to BEA’s VWAP. At BEA’s closing price of HK$33.35 the deal is worth ¥100.5 billion. SMBC’s stake is on its books at ¥90.6 billion.

SMBC added it would also name a BEA board member, according to its non-binding memorandum of understanding with BEA. It remains unclear if there will be any operational synergies included in the final version of the deal.

Change of scene

Flush with deposits, as Abenomics floods the Japanese banking system, Japanese banks have been putting the money to work overseas.

Japanese banks’ outstanding international claims hit $2.531 trillion at end-2013, up from $1.836 trillion at the end of 2009, according to the Bank of International Settlements.

The country's banks have been particularly active in the rest of Asia-Pacific, where financing needs are greater than in their own sluggish domestic market.

BEA’s lending growth rates are 2.7% for Hong Kong and 12.3% for mainland China,

However, Japanese banks have mostly been focused on Southeast Asia rather than north Asia, with bankers citing political tensions between China and Japan as a reason.

SMBC's most recent acquisition was a 12.25% stake in Acelda, Cambodia's largest bank by assets.

Japan’s megabanks have often paid eye-popping prices for foreign banks to gain access to fast-growing economies, such as SMFG’s acquisition of a stake in Indonesia’s Bank Tabungan Pensiunan Nasional (BTPN) at 4.3 times price-to-book.

At first glance analysts thought SMBC’s latest purchase looked reasonably priced. “BEA’s shares do not look overvalued versus other Asian banks, and we also look to considerable contributions to equity method income too,” said Nomura analysts.

BEA has recently been trading between 1.1 times and 1.2 times end-2013 book value.

Barclays’ banking analysts noted that the deal may take some time to cement. Based on the experience of SMBC’s new share subscription in 2012, it took about a year to get the US regulator's approval as both BEA and SMBC have operations in the US.

 

 

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