HONG KONG The trading arm of China's Guangzhou city government is to buy three quarters of Hong Kong's Chong Hing Bank Ltd (1111.HK) for about HK$11.64 billion ($1.5 billion), underscoring the island's attraction for mainland and foreign lenders alike.
Family-run Chong Hing is the second bank in Hong Kong, Asia's sixth-biggest loan market, to receive offers recently and takeover talk is also surrounding Wing Hang Bank Ltd 0302.HK.
The purchase of Chong Hing by Guangzhou's Yue Xiu Group will be the first takeover of a Hong Kong bank since the $4.7 billion deal for Wing Lung Bank by China Merchants Bank in June 2008.
In a statement on Friday, Yue Xie said the deal would help it "enhance its recognition in the market, and build its market position as an integrated financial service provider in the Pearl River Delta Region".
China's economic clout and the growth of the offshore yuan fixed-income market is enticing foreign lenders to look for footholds that will help them expand on the mainland.
Mainland Chinese banks are also seeking to branch out beyond their home turf. Hong Kong's appeal lies in the fact that it is a major source of financing for mainland Chinese corporates.
The deal would give Yue Xiu Group, which operates real estate, securities, and transportation infrastructure businesses, access to Chong Hing's 53 branches.
Hong Kong's Liu family owns about 60 percent of Chong Hing Bank, while Japan's top lender Mitsubishi UFJ Financial Group Inc (8306.T) has a 9.7 percent stake.
Yue Xiu is offering HK$35.69 per share, or a 4.6 percent discount to Chong Hing's last traded price, the two companies said, a day after Chong Hing shares were suspended pending a merger announcement.
The deal values Chong Hing Bank, whose shares have rallied 66 percent since it received offers from third parties in early August, at 2.08 times price-to-book. Hong Kong banks on average trade at P/B ratio of 1.66, according to Thomson Reuters data.
Chong Hing Bank has also entered into a sale and lease back agreement for its head offices in the central business district for HK$2.23 billion, the statement added.
Nomura Holdings (8604.T) is advising Yue Xiu, while UBS UBSN.VX was financial adviser to Chong Hing, the statement added.
Yue Xiu's move has put added focus on a possible deal for Wing Hang Bank Ltd, which has also received offers from unidentified parties last month.
Reuters reported on Thursday that Singapore's Oversea-Chinese Banking Corp Ltd (OCBC.SI) and Agricultural Bank of China Ltd (601288.SS) have emerged as potential suitors.
The price paid by Yue Xiu set the benchmark for any future Hong Kong bank deals, analysts said. Wing Hang's main shareholders are seeking P/B of 2 to 2.2, sources said. At that ratio, Wing Hang would be valued at around $5.9 billion.
The valuation of Hong Kong's family-run banks has recovered from a selloff after the financial crisis five years ago, which is encouraging Hong Kong business families to consider offers for their banks.
Hong Kong's bank market is dominated by HSBC Holdings Plc (HSBA.L), Standard Chartered Plc (STAN.L) and Chinese lenders, making it challenging for small-and mid-sized lenders.
On the one hand, rising competition has put more pressure on mid-cap Hong Kong lenders, with their return on equity slumping to 9 percent from about 20 percent in 2001, Bank of America Merrill Lynch estimates.
The new Basel III rules also put strains on family-run banks to maintain higher core capital ratios, as the main shareholders would be required to replenish capital to maintain their stake in the bank if there was any fund raising.
But with only four family-run banks left in Hong Kong, including industry leader Bank of East Asia Ltd (0023.HK) and the smallest Dah Sing Financial Holdings (0440.HK), interested buyers may feel they need to scramble to get a coveted gateway.
(Additional reporting by Elzio Barreto and Umesh Desai; Reporting by Denny Thomas; Editing by Jane Merriman and Patrick Lannin)