Bank of East Asia feels weight of its China drive

Dah Sing Banking

30/11/2015 02:37

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are own.) 
    By Una Galani 
    HONG KONG, Nov 30 (Reuters Breakingviews) - China has never 
been an easy market for foreign banks, but those that fought 
their way into the People's Republic are now feeling the pain. 
Hong Kong-based Bank of East Asia  0023.HK  has the 
second-biggest branch network on the mainland of any overseas 
lender except HSBC  HSBA.L   0005.HK . But the aggressive 
expansion of recent years is proving a drag as the outlook for 
China sours.  
    The $9.5 billion lender has had a foothold in China since 
1920 and remained there through World War Two and the Cultural 
Revolution. But its growth spurt started in 2007 when it 
established a wholly-owned local subsidiary. It now has 129 
branches and sub-branches. In the first half, China accounted 
for 38 percent of operating income. 
    As economic activity in China has slowed, bad loans have 
shot up. The ratio of impaired loans at its mainland business 
more than doubled to 2.65 percent in the six months to the end 
of June. Bank of East Asia has responded by tightening its 
lending criteria and is now talking about rationalizing its 
network. That could further drag down the 8 percent return on 
equity that the bank generates which is already below the wider 
sector's 11 percent, according to Eikon.  
    Shares of Bank of East Asia have slumped 12.8 percent so far 
this year. That's almost twice the decline suffered by the local 
benchmark Hang Seng index. After a recent wave of takeovers the 
only other independent bank in the former British territory is 
Dah Sing  2356.HK : its shares are up 21 percent over the same 
period. 
    U.S. activist investor Elliott seems undeterred, however. 
The fund has lifted its stake in Bank of East Asia from 2.5 
percent to over 6 percent while mounting a legal challenge 
against the lender's decision to sell stock to Japan's Sumitomo 
Mitsui Banking Corp. That sale further entrenches the founding 
Li family, which owns around 7.8 percent of Bank of East Asia. 
    Elliott's stake building suggests there is value to unlock. 
But that may only hold true if Bank of East Asia can keep bad 
loans at its large China business in check. 
 
    On Twitter https://twitter.com/ugalani.  
     
    CONTEXT NEWS 
    - Shares of Hong-Kong listed Bank of East Asia have fallen 
12.8 percent in the year to date.  
    - Elliott Advisors, the U.S. activist hedge fund, owned 6.02 
percent of the bank as of Sept. 23, according to Eikon. The 
stake is worth HK$4.42 billion ($570 million) at current market 
prices.  
    - In January, funds associated with Elliott filed a legal 
challenge against the bank's issuance of stock worth HK$6.6 
billion to Japan's Sumitomo Mitsui Banking Corp.  
    - A Hong Kong court deemed that there was a case for asking 
BEA to release confidential board notes explaining its decision. 
    - Following the share placement, Sumitomo now owns 17.2 
percent of BEA, Spain's Caixabank owns a further 17 percent, 
while Malaysian investment firm Guoco Group holds 14 percent, 
according to Eikon. 
    - The Hong Kong bank reported that the impaired loans at its 
mainland-focused subsidiary rose from 1.32 percent of total 
loans at the end of 2014 to 2.65 percent at the end of June.  
    - The bank warned that the outlook for the second half of 
2015 would be more challenging and that it would be vigilant 
regarding the impact of slowing growth on the mainland business. 
  
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    - For previous columns by the author, Reuters customers can 
click on  GALANI/    
 
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 (Editing by Peter Thal Larsen and Katrina Hamlin) 
 ((una.galani@thomsonreuters.com;  Reuters Messaging: 
una.galani.thomsonreuters.com@reuters.net)) 
 
Keywords: BANK EAST ASIA CHINA/BREAKINGVIEWS