Bank of East Asia pops the champagne on SMBC's hiked investment

222m new equity shares were bought.

Bank of East Asia, Limited recently announced that it had entered into a non-binding memorandum of understanding for Sumitomo Mitsui Banking Corporation (SMBC) to buy 222 million of new equity shares in Bank of East Asia.

According to a research note from Moody’s, the issuance, which would raise SMBC’s ownership to 18.0% from 9.5%, is credit positive for Bank of East Asia because it will improve its capital position.

The report said this would also increase the likelihood that Bank of East Asia will receive affiliate support from SMBC. The transaction is subject to regulatory review and approval.

Here’s more from Moody’s:

At current share prices, the transaction with SMBC would increase Bank of East Asia’s common equity by HKD7.5 billion, while its common equity Tier 1 ratio would increase to 13.3% from 11.6% as of the end of June.

The increase in Bank of East Asia’s common equity would allow it to meet more stringent regulatory requirements ahead of our expectation that Hong Kong regulatory authorities will designate the bank as a domestic systemically important financial institution.

The investment will allow SMBC to increase and diversify its Greater China credit exposures, and benefit from Bank of East Asia’s established franchise in the region, as well as China’s economic growth, which exceeds SMBC’s home market in Japan. Bank of East Asia has one of the largest Mainland China branch networks and operations among all foreign banks operating there.

There is little overlap between Bank of East Asia’s and SMBC’s customer bases in China: Bank of East Asia’s customers in China are largely domestic Chinese corporates and individuals and Hong Kong-invested companies, while SMBC’s customers are largely Japanese corporates.

We expect that SMBC’s increased stake in Bank of Asia will result in SMBC gaining board representation in Bank of East Asia, although it will continue to assume a passive role in the bank’s daily operations.

The agreement follows Oversea-Chinese Banking Corp. Ltd.’s (Aa1 stable, B/aa3 stable) recent acquisition of Wing Hang Bank, Limited (Aa3 stable, C+/a2 negative), and reflects the appeal of Hong Kong banks as strategic investments.

Hong Kong’s strong banking regulatory oversight, an absence of capital controls and restrictions on foreign investments, and its strong investment and trade ties with China underpin Hong Kong banks’ appeal to foreign banks keen to gain a foothold in the Greater China market.