Why banking licenses are getting more valuable

November 04, 2016 16:56
Bank of East Asia is one of the few local banks that have not been acquired yet. Photo: Reuters

The financial sector of Hong Kong accounts for 6.6 percent of the total jobs in the city, or about 250,000 people. It contributes a sixth of the city’s gross domestic product.

However, the operating environment in the sector is getting increasingly harsh.

Regulatory requirements have become more stringent and the cost of complying with them is rising in tandem.

At the same time, the advance of financial technology has raised transparency, thus intensifying competition.

Globally, the sector is not lacking in negative publicity. Wells Fargo is grappling with a scandal involving ghost accounts, while Deutsche Bank is facing the prospect of paying a US$14 billion penalty in the United States over its mortgage-backed securities.

No wonder bank shares trade at a fraction of their peaks. HSBC Holdings (00005.HK), for instance, is currently trading at just 0.9 times its book value.

But interestingly, banking licenses are becoming more valuable, thanks to investments from China.

As more mainland financial institutions seek to establish a foothold in Hong Kong, a banking license is getting very much sought after, especially when there are only a few local banks, including Hang Seng Bank (00011.HK), Bank of East Asia (00023.HK) and Dah Sing Banking Group (02356.HK), that are still available for acquisition.

The same is true for other licenses.

For example, a Type 9 license from the Securities and Futures Commission for asset management now costs HK$9 million to HK$12 million, up from HK$2 million a few years ago.

The price of an insurance agent license also surged to HK$1.2 million from just half HK$500,000.

This article appeared in the Hong Kong Economic Journal on Nov. 4.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.