HONG KONG: Wing Hang Bank Ltd, which surprised some analysts by cutting its dividend by 79 percent last month, may be the next family-run lender in Hong Kong to be bought by a mainland competitor.

Industrial & Commercial Bank of China Ltd, the world's largest by market value, is the mainland lender showing the most interest in acquiring Wing Hang, according to two bankers who are scouting for buyers and who spoke on condition of anonymity. Neither bank has hired advisers for a possible deal. Wing Hang shares rose 4.4 percent in Hong Kong yesterday.

A takeover of Wing Hang would cut the number of publicly traded family-run banks in Hong Kong to three from six a decade ago, as mainland-based lenders muscle in on the city. Wing Hang's dividend cut may be a sign the bank, controlled by the family of Chairman Patrick Fung, is trying to boost its value in a potential takeover, said analysts at CLSA Asia-Pacific Markets and Nomura Holdings Inc.

"Wing Hang is a well-managed, well-capitalized mid-sized bank and that in itself makes it an obvious target," said Lee Yuk-kei, a Hong Kong-based analyst at Core-Pacific Yamaichi International Ltd. "The competitive environment in the local banking sector is getting increasingly tough for family-run banks like Wing Hang," Lee said.

Wing Hang rose to HK$73.1 at the close of trading in Hong Kong, achieving gains this year of 64 percent and the bank's market value to HK$21.6 billion ($2.8 billion). ICBC spokesman Xie Taifeng declined to comment, as did Cherry Yung, a spokeswoman at Wing Hang.

No formal talks have been held between Wing Hang and Beijing-based ICBC, which last year lost out to China Merchants Bank Ltd in a takeover battle for family-controlled Hong Kong lender Wing Lung Bank Ltd, the bankers said.

The bank's board said August 13 it will pay an interim dividend of 20 Hong Kong cents per share. The proposed payout represents 11.5 percent of earnings, down from 13.3 percent in the year-earlier period.

Reducing the dividend was unnecessary because Wing Hang already had a capital adequacy ratio of 17.7 percent, CLSA analysts Kevin Chan and Kitty Chan said in a note to clients the day after. The regulatory minimum ratio in the city is 8 percent.

"The dividend cut may imply M&A is the real story here," the analysts wrote. Retaining a higher portion of profit may raise Wing Hang's book value and push up the sale price in a takeover, they said.

Wing Lung Bank reduced its dividend three months before the announcement of its HK$4.7 billion takeover by China Merchants Bank in May 2008.

ICBC has $241 billion in cash and equivalents, almost 100 times Wing Hang's market value. The mainland bank, run by Chairman Jiang Jianqing and majority-owned by the government, in 2000 paid HK$1.8 billion for control of Union Bank of Hong Kong and renamed it ICBC (Asia) Ltd. Four years later, it completed the purchase of Fortis Bank's unit in the city for HK$2.53 billion.

"The deal would make sense," said Dominic Chan, a banking analyst at BNP Paribas SA. "ICBC (Asia) primarily focuses on syndicated loans while Wing Hang has a good retail branch network. Also, as ICBC is making a push in Macao, it will find Wing Hang's strength there very useful."

Macao, the enclave neighboring the mainland city of Zhuhai in Guangdong province, accounted for 20 percent of Wing Hang's first-half pretax profit, up from 17 percent a year earlier.

One obstacle to a deal may be restrictions on how much the country's banking regulator would allow ICBC to pay, said Chan.

Last year, when ICBC was competing for Wing Lung Bank, the China Banking Regulatory Commission barred the lender from paying more than 3 times book value, people familiar with the matter said at the time. Merchants Bank eventually paid 3.1 times book value, making it the most expensive bank acquisition in Hong Kong in seven years, by that measure.

Merchants Bank, based in Shenzhen, said in April that it had written down the value of the investment by 579 million yuan ($85 million).

The central regulators "won't want to see another bank overpaying so soon after what happened with China Merchants," said Chan.

A takeover would likely value Wing Hang at between 2.5 and 3.3 times book value, Nomura analysts Grace Wu and Queenie Poon said in an August 13 note to clients. The bank trades at 1.9 times book value, according to Bloomberg data.

Hong Kong is attractive for mainland banks as the yuan comes to be used for international trade settlements, according to CLSA. The city serves as a hub for goods traveling to and from the mainland, the world's third-largest economy.

China Daily - Reuters

(HK Edition 09/10/2009 page4)