What China Life's rejected Wing Hang Bank acquisition means for Hong Kong banks

It's a positive for smaller listed banks.

According to Bernstein Research, China Life previously sought to buy a 15% stake in Wing Hang Bank (WHB) in 2008 from BNY and the Fung family.

The deal was rejected by Hong Kong M&A authority on the grounds that it should trigger a mandatory offer for all shareholders as the Fung family was deemed to have a de facto control of over 30% after the proposed transaction. 

Here's more from Bernstein Research:

From the perspective of the HK banks:
∑ This news is certainly a positive for the other smaller listed banks (e.g., Dah Sing, BEA) as these media reports will likely result in an M&A premium being placed on these smaller names.

∑ For the past 4 years, we have been skeptical of these smaller HK banks being acquired as we saw little strategic value in acquiring these subscale entities operating in one of the most competitive banking markets in the world. However, it appears that someone is now willing to purchase a stake in these banks.

∑ Wing Hang Bank's profitability is sub-par relative to the other banks we cover like BOC(HK) and Hang Seng. Wing Hang's ROE has averaged just 11.5% over the past 4 years while its ROA has been just 1.02% over this time.This compares to ROEs in the mid-to-high teens for BOC(HK) and Hang Seng and ROAs of 1.3-1.8%.

- Assuming Wing Hang is purchased at a 2.5-3.0x P/B valuation, it would be a VERY generous price for a bank with this profitability profile and almost certainly dilutive, even adopting the most liberal assumption for synergies.

∑ That said, the last local HK bank to be acquired was Wing Lung Bank (by China Merchants Bank) at 3.2x book value. That deal, which closed the week of the Lehman Bros bankruptcy in Sept 2008 - 5 years ago this week - turned out rather poorly for the acquirer, CMB.

- Similar to Wing Hang Bank, Wing Lung Bank was a subscale banking franchise with an average ROE of 12-13% in the years leading up to its acquisition (in a much healthier profitability environment).

∑ Within our HK Banks coverage, we think BEA will benefit the most from these media reports as it has been subject to perennial takeover reports over the past 6-7 years. While we don't expect BEA to be acquired in the next 2 years, its shares will surely reflect a higher M&A premium in the immediate future.

We do not expect BOC(HK) & Hang Seng to benefit as their majority owners (Bank of China and HSBC, respectively) will not sell their stakes in these subsidiaries.