Hong Kong’s Family-Owned Banks on Different Paths for Now

Hong Kong’s Family-Owned Banks on Different Paths for Now

ENDA CURRAN

April 1, 2014 7:12 a.m. ET

Two of Hong Kong’s three remaining family-owned banks are taking divergent paths. As one banking dynasty sells out, another is raising capital to grow its bank, signaling that it has no intention to sell for now.

Wing Hang Bank Ltd. 0302.HK +0.32% ‘s founding Fung family this week agreed to a sale to Singapore’s Oversea-Chinese Banking Corp. O39.SG +0.42% for nearly US$5 billion. That deal comes as rival Dah Sing Banking Group Ltd. 2356.HK +2.94% , owned by the Wong family, plans to raise at least US$116 million through a share issue.

Hong Kong’s other remaining family-owned bank, Bank of East Asia Ltd. 0023.HK 0.00%, could be open to a sale but only for a much higher valuation than the market currently places on it, Chairman David Li said in February.

For potential buyers, Hong Kong banks such as Dah Sing offer an attractive gateway to mainland China as Beijing liberalizes the country’s financial system and expands the yuan’s role in global markets.

After years of stable ownership, the city’s family-owned banks have seen two sales in recent months. Late last year Chinese conglomerate Yuexiu Enterprises struck a deal to buy a majority stake in Chong Hing Bank for around US$1.5 billion.

But Wing Hang could be the last Hong Kong bank to be taken over for some time. Rather than signal an intent to sell, Dah Sing has said its share offer–a rights issue to existing shareholders–is designed to bolster the bank’s capital base and grow its business.

“We are well-positioned to grow in our key markets, including the mainland, Macau and our Hong Kong hub,” Harold Wong, Dah Sing Banking Group’s chief executive, said in a statement last week.

Analysts believe the capital-raising move by Dah Sing will cool any speculation of a takeover.

“Although we believe Dah Sing remains a prime takeover target, the likelihood of a takeover in the near term may be smaller than we expected previously,” analysts at Daiwa wrote in a note last week.

“We believe Dah Sing will use part of its rights-issue proceeds to expand its organic China profit contribution, and expect more M&A interest in Dah Sing from regional bidders once it builds a more meaningful presence in China,” they said.

Banking in Hong Kong is dominated by the likes of HSBC Holdings HSBA.LN -0.38%PLC and Standard Chartered STAN.LN +0.24% PLC, but other lenders are offering growing competition that is pressuring profits at smaller banks and triggering consolidation.

“Our general concern on Dah Sing remains its low profitability outlook, as we believe the smaller banks such as Dah Sing will see greater profitability pressures under a harsher operating environment,” Macquarie analysts said in a note last week.

Hong Kong’s banks face other risks. The yuan’s surprising depreciation this year has thrown a spotlight onto a sharp increase in lending into China by Hong Kong banks, especially to clients trying to profit from the difference in interest rates between Hong Kong and the mainland, where rates are higher.

Such cross-border lending now represents up to a third of all deposits in Hong Kong–around US$427 billion–compared with just a fifth in 2010, UBS UBSN.VX -0.11% notes.

The growth in such lending means Hong Kong’s banks are vulnerable to a sharp slowdown in China’s economy, which could fuel a spike in bad loans.

Closer to home, Hong Kong lenders are also vulnerable to a correction in the city’s home prices, which have cooled in recent quarters as the government applied tools such as a tax on foreign buyers to ease demand. Before the launch of that tax in late 2012, prices had risen 120% since 2008.

“Hong Kong property prices are declining and cases of mainland bond defaults are increasing,” said Krishna Guha, an analyst at Jefferies. “We think the current credit cycle warrants some caution.”