Potential Chong Hing deal may break HK banking M&A drought

HONG KONG Thu Aug 8, 2013 1:28am EDT

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HONG KONG (Reuters) - Chong Hing Bank Ltd (1111.HK) has received a takeover approach from a company controlled by a Chinese city government, a person familiar with the matter said, in what could be the first M&A deal in Hong Kong's banking sector since 2008.

Shares in Chong Hing, which has a market value of about $1.5 billion and is part-owned by Japan's top lender Mitsubishi UFJ Financial Group Inc (8306.T), jumped as much 23.4 percent to a life high after the bank said it had received an approach. It is the smallest of Hong Kong's family run banks in a sector long seen as ripe for consolidation.

But with returns on Hong Kong banks shrinking over the past decade, many potential bidders have moved to the sidelines and analysts say other banks are unlikely to follow suit.

"For family banks, we believe memories of rich valuations being offered remains vivid, and as such, we believe pricing will have to be extremely competitive to entice potential sellers," Bank of America Merrill Lynch said in a report.

Late on Wednesday, Chong Hing said its biggest shareholder Liu Chong Hing Investment Ltd (0194.HK), which owns 50.2 percent of the bank, has received a takeover approach from third parties but did not identify them. They added that no agreement had been reached.

A person familiar with the matter told Reuters that Yue Xiu Enterprises (Holdings), which is controlled by the city government of Guangzhou, is a suitor, confirming a report by the Hong Kong Economic Journal. It was not immediately clear if Chong Hing has been approached by a consortium or separate suitors.

The source, who declined to be identified as the discussions were confidential, said a deal could be done around two times Chong Hing's price to book, a near 51 percent premium to Chong Hing's current price to book ratio of 1.32. That would value the bank at $2.27 billion.

Yue Xiu is seeking a one-year bridge loan to back its acquisition of a stake in Chong Hing, Basis Point, a Thomson Reuters publication, reported on Wednesday.

Chong Hing Bank does not require MUFG's permission to strike a deal, under an agreement with Chong Hing's founding family in 1994. Sources played down the chances of MUFG, which owns 9.7 percent stake in Chong Hing, making a rival bid.

MUFG was not available for an immediate comment.

FIERCER COMPETITION

Chong Hing's new CEO Lau Wai-man said in March that the lender was open to proposals from prospective buyers for all or part of the bank.

There are four family-run publicly traded banks in Hong Kong. Bank of East Asia (0023.HK) is the biggest with a market value of $8.8 billion, followed by Wing Hang Bank 0302.HK and Dah Sing Financial Holdings (0440.HK).

Competition in Hong Kong market has intensified, with global banks and Chinese lenders stepping up their presence in the island city. As a result, return on equity for mid-cap Hong Kong banks has dropped to 9 percent from about 20 percent in 2001, according to Bank of America Merrill Lynch estimates.

Singapore's DBS Group Holdings Ltd (DBSM.SI) bought Dao Heng bank in 2001, which was another family-run Hong Kong lender.

Any potential deal would be the first Hong Kong bank M&A since 2008 when China Merchants Bank bought Wing Lung Bank.

"There could be a transformation of business growth after the acquisition - just look at Wing Lung which went into a growth mode after the China Merchant's acquisition," said a Hong Kong based credit analyst, who was not authorized to speak to the media.

But he was unsure about the benefits of an acquisition to Yue Xiu.

"There is no apparent strategic fit - Yue Xiu has some non-banking operations like securities and asset management in its financial services involvement but no banking business," he said.

Chong Hing Bank's 6 percent bonds due 2020 were trading at 280/250 basis points over US Treasuries, having widened by 15-20 basis points since the news.

(Additional reporting by Donny Kwok in HONG KONG and Taiga Uranaka in TOKYO; Editing by Edwina Gibbs)

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