Hang Seng Bank will sell a 5% stake in China's Industrial Bank for Rmb12.73 billion ($2.03 billion) to improve its regulatory capital position.
Goldman Sachs' Sino-foreign securities joint venture, Goldman Sachs Gao Hua Securities, is handling the share sale, according to a filing on the Hong Kong Exchange website.
Hang Seng, which is Industrial Bank’s second-largest shareholder, will sell up to 952.6 million shares at Rmb13.36 per unit, representing a 7% discount to the February 9 closing price on the Shanghai Stock Exchange.
Hang Seng, a subsidiary of HSBC, previously owned 10.87% in Industrial Bank and will see its stake sliced to 5.87%.
A-share blocks traditionally have a single buyer and a single seller. But sources say this block was the first to have multiple investors. The majority of the deal was wall-crossed in the past 48 hours. The final book was made up of a small group of Chinese and international institutional investors.
The deal, which has been in the works for a number of weeks, was originally offered to onshore investors.
However, demand allowed the syndicate to expand to international investors with QFII (qualified foreign institutional investor) quota. Still, the number of investors remained limited, making it more akin to a club deal.
The share sale has been long expected. Stuart Gulliver, HSBC’s chief executive, has previously said the group intended to sell its stake although the timing was uncertain.
“The potential disposal of IB would likely be a big positive catalyst for Hang Seng Bank, in our view, as the drag on ROE [return on equity], capital and dividend outlook caused by IB would be removed,” said Barclays banking analyst May Yan ahead of the placing.
Hang Seng Bank’s stake in Industrial Bank needs to be fully deducted against core tier 1 capital according to Basel III rules.
The share sale strengthens Hang Seng Bank’s common equity tier 1 (CET1) and tier 1 capital ratios by approximately 2.3 percentage points and the total capital ratio by approximately 3.8 percentage points. As of June 30, the bank’s CET1 and tier 1 capital ratios were both 11.8% and the total capital ratio was 14.2%.
It comes at a time when Hong Kong banks are seeing bad loans rise in their mainland China portfolios. Hang Seng Bank is slated to report results February 23.
Hang Seng Bank’s share sale follows a sharp rally in mainland China stock markets. The benchmark Shanghai Stock Exchange Composite Index has rallied by about 35% since late October.
Hang Seng Bank first bought a 15.98% stake in Industrial Bank for Rmb1.7 billion in 2004. It bought more for Rmb2.3 billion in 2010 by subscribing to its rights issue.
However, Hang Seng Bank’s holding was diluted as a result of a private placement by Industrial Bank in January 2013, from 12.8% to 10.9%.
Hang Seng Bank also lost “significant influence” over Industrial Bank under accounting rules; as a result, the accounting treatment for the stake was changed from an “associate” (in which the share of profits are included in Hang Seng Bank’s earnings) to a “financial investment” (in which only the dividends from Industrial Bank are included).
Given that Industrial Bank’s dividend payout ratio is relatively low, at 21% in 2013, the earnings contribution from the mainland Chinese bank shrank substantially. Hang Seng’s ROE declined from 23% in 2012 to 15% in its 2014 earnings. Barclays estimated that Hang Seng Bank’s 2015 ROE could rise to more than 21% from 16% when the stake is sold.
