Buying the Bank of East Asia: A risky move?

BEA

Bank of East Asia

Buying the Bank of East Asia: A risky move?

Bank of East Asia: Overview

The Bank of East Asia is a relatively old and established institution. It was incorporated in 1918 and it opened its first branch in Mainland China in 1920. Today the bank is a major regional and international financial player. It provides both retail and commercial banking services to its customers in Hong Kong, Mainland China, and all over the world, including the U.S. BEA is the largest independent local bank in Hong Kong and "has built its reputation as a pioneer in the provision of innovative, value-added banking services to customers on the mainland" (Bank of East Asia, 2011, Bank Rating). It has established itself amongst the investment community as one of the most consistently high-valued stocks of the Hang Seng Index (Bank of East Asia, 2011, Bank Rating).

The Bank offers services to both personal and commercial investors, including personal banking, investment banking, and wealth management. It issues credit cards, mortgages, and engages in foreign trading. BEA "operates one of the largest networks of any bank in Hong Kong, with 140 branches and SupremeGold Centres throughout the city" (Bank of East Asia, 2011, Bank Rating). However, in terms of personal services to customers, it should be noted that the nation of Hong Kong only started offering depositor insurance only two years ago. "A government-backed bank deposit protection board, financed with fees collected from banks, now guarantees accounts up to 100,000 Hong Kong dollars, or $12,800, for each depositor" (Bradsher & Timmons 2008:1).

BEA has developed joint ventures with international financial institutions. The most recent development of significance for BEA is the fact that Industrial & Commercial Bank of China Ltd. has acquired a majority stake in Bank of East Asia Ltd.'s U.S. subsidiary. "ICBC will pay $140 million for an 80% stake. Bank of East Asia, which is a publicly-traded company based in Hong Kong, has a total of 13 branches in New York and California... Americans could walk into the retail branches, open check and savings accounts and, most significantly for many investors, open Yuan accounts to trade the currency" (Wei 2011). BEA has already sold 70% stake in its Canadian operations to ICBC. BEA's U.S. And Canadian branches are concentrated in areas with high Asian populations, and members might be more apt to engage in commerce and trade with the Pacific Rim, making the ability to trade Yuan a significant plus.

ICBC hopes to use BEA as its springboard into the U.S. market, where Chinese financial services expansion has lagged behind construction and other commercial efforts. BEA hopes that ICBC's success will deflect attention from some of its recent scandals, such when it was revealed that David Li, its current head "the former board member of Dow Jones, became the target of an insider-trading case involving News Corp.'s buyout bid for Dow Jones. Mr. Li later agreed to pay $8.1 million to settle the civil charges" (Wei 2011). There were also fears that the financial crisis would negatively impact BEA given there were (ultimately false) rumors that BEA was heavily invested in the failing Lehman Brothers investment bank.

Purchasing BEA

Despite some of the difficulties BEA has experienced recently, its overall financial health appears strong. Furthermore, "Banks in Asia tend to follow the European model of combining commercial and investment banking, or relying just on commercial banking, instead of following the American model until recently of allowing highly leveraged investment banks" (Bradsher & Timmons 2008:2). The World Bank recently released a very salutary report about the health of the region in which BEA was operating: "The economic recovery in East Asia and the Pacific is robust" including exports, despite the increased appreciation rates of East Asian currencies due to the regional economic recovery (McDonald 2011). The main concern articulated about the East Asian region was inflation: "The dramatic rise in the flow of money into Asian banks might be passed through to borrowers, raising the threat of an increase in nonperforming loans and harm to banking systems" (McDonald 2011).

But according to its own, most recent financial data, BEA has rebounded from scandals and the financial crisis: in February it recorded a record profit for 2011 of 4.3 billion HK dollars "(552.4 million U.S. dollars) in 2010, jumping 60.8% from a year earlier" (HK's Bank of East Asia posts record after-tax profit for 2010, 2011, Lonely Planet). "In an annual-result statement filed to the Hong Kong stock exchange, Bank of East Asia said the bank's basic earnings per share for 2010 were 1.92 HK dollars, up 38.1% from that of 2009" (HK's Bank of East Asia posts record after-tax profit for 2010, 2011, Lonely Planet). The increase was attributed to the bank's "strong growth in the loan and debt portfolios in 2010...the Bank's net interest income rose by 796 million HK dollars, or 11.8%, to 7.5 billion HK dollars...fee and commission income jumped by 680 million HK dollars, or 30.1%, to 2.9 billion...non-interest income increased by 142 million HK dollars, or 4.1%, from a year earlier" (HK's Bank of East Asia posts record after-tax profit for 2010, 2011, Lonely Planet).

Greater financial integration between mainland China and Hong Kong was also cited as another of the sources of the spike in BEA's profits. The Bank's mainland subsidiary had become a source of referrals in the areas of corporate lending, trade finance and wealth management (HK's Bank of East Asia posts record after-tax profit for 2010, 2011, Lonely Planet). Given that these areas were predicted to grow in the near future, BEA's continued financial health was said to be robust according to its own data and to independent market observers.

Thus, if a large corporation wished to purchase BEA, it should be aware of the Bank's financial health, its strong joint partnerships with other institutions, and its relatively secure market position. A hostile takeover would not be advised, given that this is not a weak, troubled bank, along the lines of the acquisitions of some of the faltering institutions during the 2008 financial crisis. Instead, buying a stake in desirable components of the BEA empire, much like ICBC, would be the most advisable way to engage in a joint venture with the company, rather than to actively compete with such a strong, emerging financial power.

Ideally, rather than a hostile action, the activity should be motivated in a spirit of mutual cooperation, in a manner which would be advantageous to both entities -- both BEA and the purchasing entity. In the case of ICBC's venture with the bank, "The transaction would mark the first purchase of a majority stake in a U.S. depository institution by a Chinese bank. If completed, it may give financial firms in both countries greater access to each others' markets" (Campbell 2011). It may also stimulate BEA's desire to engage in similar partnerships with other institutions

Thus, if a large corporation wished to purchase BEA outright, it should be aware of the roots that BEA has created internationally and its particular strengths in establishing connections with expanding enterprises in Mainland China. This would likely make BEA unwilling and able to resist a takeover or purchase. Its soaring stock prices make 'buying out' the company financially unfeasible. However, BEA's openness to advantageous partnerships, particularly outside of its core, regional base of the Pacific Rim might make it hospitable to working with other institutions. Purchasing specific branches in desirable components of BEA's empire could open up access to new markets and also generate new relationships with consumers who are drawn to BEA's Asian orientation and its diversity of financial services combined with its strong connections with China. But the agreement must be mutual, otherwise BEA will surely resist such efforts.