BOC Hong Kong Holdings Ltd. (2388.HK) is reportedly weighing a divestment of subsidiary Nanyang Commercial Bank (NCB) and Chiyu Banking Corp.
In its regulatory filing, BOCHK said the bank is conducting a feasibility study to review the group’s business and assets portfolio, but did not confirm or deny the disposal plan.
NCB is wholly owned by the BOCHK, while Chiyu Banking Corp. is 70.5 percent-owned by the bank. One potential buyer interested in NCB is China Cinda Asset Management Co. Ltd. (01359.HK), but Cinda denied any discussion for the spin-off.
A deal would come after three of Hong Kong’s smaller banks — Wing Hang Bank, Chong Hing Bank and Wing Lung Bank — were acquired by bigger peers in recent years.
If a disposal takes place, it would be different from the deals involving small local banks in the past. NCB and Chiyu Banking Corp. are both affiliated with BOCHK. As a state-owned bank, it should have a sensible incentive to decide to dispose of its assets.
BOC Hong Kong focuses on local business development, and it’s quite natural for the bank to review its business and asset portfolio.
The bank reported a first-tier core capital ratio of 11.76 percent by mid-2014, compared with 13.12 percent in NCB. That should rule out any need for fund-raising. The ROE ratio of BOCHK reached 14.75 percent, compared with 9 percent for NCB.
Currently, NCB contributes about 13 percent of earnings for BOCHK. But NCB’s ROE ratio could drag on its parent. As such, it’s not sensible for BOCHK to dispose of NCB to boost ROE.
Theoretically, NCB runs its business separately. However, its business strategy should be decided and monitored by the parent, who should be blamed for the unit’s high bad debt ratio. If that’s the reason for an NCB sale, that would not be sensible move for BOCHK as it would show its weakness in restructuring business.
BOC Hong Kong should have already noticed the high bad debt level at NCB, and its response by issuing an exchange filing would indicate its desire to offload the business.
Most of the bank acquisition deals target family-owned businesses, which struggled with succession issues. The proposed divestment of NCB may help reduce risk, but it may hurt the goodwill of BOCHK.
Market rumors suggest that the deal could fetch HK$46.8 billion, equivalent to 1.4 times the net asset value of NCB as of mid-2014. By contrast, Singapore’s Oversea-Chinese Banking Corp. bought Wing Hang Bank at 2.02 times NAV last year, while Yuexiu, a trading arm of the Guangzhou government, purchased Chong Hing Bank at 2.91 times NAV in 2008.
Many believe that BOC Hong Kong has no capital need to dispose of NCB, and the bank may issue a special dividend after the sale, which is good news for shareholders. However, the sale could be detrimental to its image due to its smaller size.
The Wing Hang deal has been fully reflected in the share price, but that may not be the case in an NCB spin-off.
This article appeared in the Hong Kong Economic Journal on Feb. 3.
Translation by Julie Zhu
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