[HONG KONG] One of Hong Kong's last remaining independent lenders last week dropped a shareholder agreement that had been a key plank in its defence against a potential takeover. Yet analysts aren't rating the stock as if an acquisition was on the horizon.
Bank of East Asia Ltd, co-founded by the family of Chairman David Li, is trading at close to the widest discount to its assets in seven years - a valuation that's almost a third of what the most recent bank deals in Hong Kong were struck at.
That gap means it's unlikely that Mr Li will get an offer he or his biggest shareholders can accept, according to analysts and investors.
"Buying Bank of East Asia means buying a banking license and the company's business in China," said Edmond Law, a Hong Kong-based analyst with UOB-Kay Hian Holdings Ltd. "But nobody is expecting the bank to put itself up for sale now. Why would the management sell itself cheap?"
Dim prospects for a takeover and concerns over asset quality in China help explain why BEA is the most-unloved stock among analysts of the biggest publicly traded banks in the Asia- Pacific region, according to data compiled by Bloomberg.
The bank's China exposure prompted Goldman Sachs Group Inc. to reiterate its long-standing sell rating on BEA stock last Thursday.
It also explains why BEA shares failed to react to an announcement earlier in the week that its second-largest shareholder, Criteria Caixa SA, had been released from an earlier obligation to back the Hong Kong lender's board on any takeover bids it received.
Despite the watering down of the bank's anti-takeover defences, BEA's shares are down 6.8 per cent since that announcement, compared with the Hang Seng Index's 4 per cent loss. The bank's price-to-book ratio sank to 0.72 times on Thursday, a level last seen in March 2009, and far below the valuations of Hong Kong's two most recent bank takeovers.
The market's attitude toward a China-focused bank has shifted dramatically since the days when other Hong Kong banks were snapped up by overseas suitors at heady valuations.
Oversea-Chinese Banking Corp's 2014 acquisition of Wing Hang Bank Ltd was done at 2 times book, while China Cinda Asset Management Co offered 1.95 times to buy Nanyang Commercial Bank Ltd last year.
The chance of a BEA sale "is very slim," said UOB Kay- Hian's Law. "BEA would only sell if they are offered a very high price, higher than the previous banking deals in Hong Kong. Otherwise, they won't be interested."
Now, BEA's exposure to China, which represents about a third of its total lending, is seen in a less favourable light and helps explains the bank's lowly rating among analysts. None of the 15 analysts tracked by Bloomberg who follow BEA have buy ratings on the stock.
Eight recommend investors sell and the rest rate it a hold, giving BEA a consensus rating of 1.93 out of 5, the least among the Bloomberg Asia Pacific Banks Index's 56 members.
The bank's nonperforming-loan ratio in China more than tripled to 2.65 per cent by June from a year earlier, higher than the 1.5 per cent average for the nation's banks the same month.
Brian Li, BEA's deputy chief executive officer, said in a September interview that the bank will take action on its China business that is "dragging down our overall performance."
Some analysts are skeptical if Criteria Caixa's new flexibility on considering bids will make a takeover more likely, given the bank's shareholding structure. The Li family owns at least 8 per cent of BEA, while Criteria Caixa holds 17.2 per cent through its CaixaBank SA unit, and Sumitomo Mitsui Banking Corp.owns 17.4 per cent. The condition won by the Spanish banking group is one that Sumitomo Mitsui already has.
Representatives for BEA and its two major shareholders declined to comment.
"The anti-takeover alliance formed by the Li family, the Spanish bank and the Japanese bank is still there," Francis Lun, chief executive officer of Hong Kong brokerage Geo Securities Ltd. "The looser shareholding requirement indeed leaves room for a possible takeover, but the alliance is strong enough to prevent a sale from happening."