Hong Kong Financial Services:Introducing M&A framework for HK Banks;highest potential for M&A

Smaller banks are the most likely targets

    In HK’s relatively open and mature banking sector,there has been an M&A deal every year over thelast two decades, as HK’s proximity to China andits status as a key financial center has attractedthe interest of offshore banks looking to procure abanking license. More recent acquisitions havetargeted the smaller, family controlled banks asan easier entry point into HK. The acquirers havegenerally been large (of late China)banks/corporates, where maximizing ROI mightnot be the most important criteria. Hence, recentM&A multiples of 1.8X-2.2X are higher than the1.5X median P/B since 1995.

    Adjust BEA/DSBG/DSFH’s TPs for M&A

    We introduce our M&A framework afterconsidering the key metrics influencing thelikelihood of M&A activity for our stocks. We seeDSBG and DSFH (M&A rank of 1), followed byBEA (M&A rank of 2) as having the highestpotential for M&A in the next 12-months. Weincorporate a 30% M&A probability weighting intoDSBG/DSFH’s TP’s (in line with the M&A rank of1) and 15% into BEA’s TP (M&A rank of 2).

    Dah Sing: highest M&A potential; NeutralDSFH and DSBG

    DSFH has entered into an agreement to sell its lifeinsurance business. DSFH would continue to ownthe general insurance business and the acquirer ofthe life business would use DSBG’s network forselling its products. We believe both DSFH/DSBGhave a high M&A probability given the attractiveinvestment experience arising from the divestmentof the insurance business and the relatively smallscale of the banking business. However, anydiscussions are complicated by the fact that familymembers associated with key shareholders areinvolved in running the bank.

    BEA: high valuations not justified byfundamentals; Sell

    BEA’s share price has rallied c.35% from Feb lows.

    A shareholder has recently published letters toshareholders that suggest the bank should putitself up for sale. However, the family and keyshareholders (SMFG, Criteria) control 46% ofshares and have shown no intention to sell thebank. Maintain Sell on weak fundamentals, ournew 12-m TP implies 16% potential downside.