Last Friday, Wing Hang Bank announced the signing of a share purchase agreement to acquire Chekiang First Bank for HK$4.8 billion ($615 million) from Mizuho Corporate Bank. The acquisition is to be paid for entirely in cash, after adjusting for a dividend to be paid by Chekiang First to Mizuho. Morgan Stanley acted as financial advisor to Wing Hang and here, Matthew Ginsberg, the bank's head of FIG for Asia Pacific and Terence Keyes, an MD in the M&A group explain the rationale behind the transaction.
There has been a lot of talk about consolidation in the Hong Kong banking sector. What's the history of this deal?
Ginsburg: It was an auction process run by Mizuho and their advisers Merrill Lynch. It started approximately three months ago.
Does this auction signal there will be a fresh wave of consolidation in Hong Kong's banking market or is this a one off?
Ginsburg: I don't think it signals an impending wave of M&A in the Hong Kong banking market. There were particular circumstances that led to this sale, and while there are similar sized banks to Chekiang First Bank, they are all well capitalized and profitable and there is nothing that's forcing them to sell. There are also a number of family issues that mean it is less rather than more likely.
Keyes: In this case you had a seller - Mizuho - that had a desire to divest at this point.
The family owners of the other banks must look at this deal with some horror. The price was 1.22 times book. That's about a third of the price paid by DBS for Dao Heng.
Keyes: It's the lowest book multiple paid since the DBS acquisition of Kwong On in 1998.
So will the families think, "The market just isn't there for us to sell our bank, because the prices are now too low?"
Ginsburg: Different banks command different prices for obvious reasons. This is partly reflected in their stock prices. You can't just extrapolate that if a family put their bank on the market they would definitively get this multiple. Just as you couldn't extrapolate that if anyone put their bank on the market immediately after the DBS/ Dao Heng trade, they would get 3.3 times book. There are some who have more strategic franchises that would rightly believe they would get a premium to the price paid for Chekiang First Bank.
How would you describe the Chekiang First Bank franchise? What got people excited or not excited about the bank during the auction process?
Ginsburg: Chekiang First Bank was interesting to Wing Hang because it was of a manageable size, offered meaningful synergies, was of a similar culture and therefore they felt comfortable they could merge successfully.
Keyes: An additional attraction is that Chekiang First has been conservatively managed so the quality of the loan book and the asset quality are generally high.
Is this a bank dominated by mortgage lending?
Keyes: It has a strong retail focus. The mortgage book is around 36% of the assets.
The mortgage market in Hong Kong is not doing at all well. Does that fact not lead to potential M&A of this variety, with owners thinking the mortgage market is getting worse and worse, and thus the value of their franchise is too?
Ginsburg: The first part of that statement is true. Banks that have historically relied on mortgages to drive earnings face a challenging operating environment. But many of the smaller Hong Kong banks have taken the money they would otherwise have lent and redeployed it through their treasury operations to earn money in the US. Effectively they are borrowing in a deflationary environment and can go out and buy fixed income securities in the US, earn a yield which is commensurate with mortgage securities and not take very much risk, on a risk-weighted basis but also on an FX basis.
Of course, the banks would like to see the mortgage market rebound because not only do you sell mortgages, but you sell other products and you develop a much stronger relationship with your customer. But just by virtue of the fact that the mortgage market has been very slow does not mean the banks have not been able to turn a profit as you can see from their results.
This transaction creates the fourth biggest bank, according to the press release. Which are bigger?
Keyes: To be clear, that is the fourth largest, listed, Hong Kong-based bank by assets. So ahead of it are Hang Seng, BOC and Bank of East Asia. It excludes HSBC, Standard Chartered and DBS.
So if you put those banks in it would be seventh?
Keyes: That's right.
Are the management looking to do another deal?
Keyes: Management feel they have a fair amount on their plate in the short term. But they will continue to look at opportunities that meet their acquisition criteria. In the near term they expect to be focused integrating Chekiang First.
Chekiang First Bank has 17 branches. Will there be branch closures?
Keyes: They have made the point that they don't have a particularly extensive branch network [27] across Hong Kong. But they will need to close some branches that are situated close to Wing Hang branches and in turn open new branches using existing staff wherever possible.
Does this transaction fit into an overall China strategy? Do they feel they need to have critical mass in Hong Kong before they can do things across the border?
Ginsburg: It's a step in that direction. But this was an opportunity for Wing Hang to make themselves more profitable and a stronger competitor in their home market. That was the overall driver.
Keyes: They already have a branch in Shenzhen and rep offices in Shanghai and Guangzhou.
This is going to be financed by a US$250 million bond. How is that going to affect the capital base?
Keyes: That financing is going to qualify as lower tier 2 capital. It is going to be a subordinated debt offering. That will maintain the overall capital adequacy level of Wing Hang at the conservative levels the HKMA feels comfortable with. But from Wing Hang's perspective their capital base will become better optimized than it was before. Beforehand they basically had all equity, and now they will have equity and debt capital and this is helpful from the perspective of return on equity.
