Asia: Last man standing – BEA fights Elliott action

David Li, BEA

There is just one big independent bank left in Hong Kong, and it is under siege. Bank of East Asia is a throwback of sorts: it is still run by the Li family that founded it in 1918, it is a Hong Kong staple, a constituent of the Hang Seng Index and a ubiquitous presence through its lucky 88 branches. 

It is a mainland pioneer too, one of the first foreign banks to be allowed to establish a locally incorporated bank there back in 2007, and the first to launch renminbi credit cards on the mainland the following year. 

But that profile caught the unwelcome attention of self-styled activist investor Elliott Management in 2010, and since then the Paul Singer-led outfit – best known for taking on the Argentinian sovereign in its tortuous debt default negotiations – has built a 7.1% stake. All this year it has lobbied for a change of management, and in July went one step further and took to the courts.

The petition, seen by Euromoney, is characteristically punchy, accusing the management of “repeated breaches of fiduciary duties… whereby the value of the shares and the voting rights of the petitioners have been diminished”, as well as “repeated and serious lapses of corporate governance” and “ongoing serious mismanagement of the company”.

While ultimately Elliott wants the Li family out in the hope that it will generate a bidding war and a handsome profit for its shareholders, its objections in the Hong Kong petition are very specific. They relate to strategic investments held by Criteria Caixa, the parent of Spain’s CaixaBank, and Sumitomo Mitsui Banking. 

Those two own 36% of the bank between them, which, combined with the 7% held by the Li family and the fact that both the strategic shareholders have apparently committed to following the direction of BEA’s board, insulates the Li family from any attempt to remove them. 

Elliott argues, and it is not alone in this, that this insulation is the only reason those partnerships exist at all, and that the share placements that facilitated them have increased BEA’s overall number of shares by 37% since 2007, diluting shareholders. 

Among other things the petition asks the strategic shareholders to be freed of any commitment to back the board or any restrictions on selling their stakes, which would make the Li family much more vulnerable. The first hearing will be on September 21.

August 19 brought BEA’s interim results, and the first chance to hear chairman David Li respond. “The petition makes Elliott’s intentions clear,” says Li. “It is yet another attempt to put the bank into play and force a sale. We have heard Elliott’s arguments before. Their tactics only seek to serve their own short-term self-interest.” The best way to build shareholder value, he says, “is to focus on executing our business plan and on leveraging the valuable franchise that we have built.”

But just how valuable is that franchise? The interim announcements showed a 37.5% drop in net profit year-on-year as economic conditions deteriorated in Hong Kong and on the mainland. Return on equity almost halved, from 8.7% to 4.8%. 

The bank has had to create special teams to manage distressed assets following a troubling rise in non-performing loans on the mainland, and has frozen headcount and implemented a three-year cost-cutting plan to save HK$700 million by the end of 2018. It laid off 180 jobs in June alone and has axed 22 securities outlets. 

Yet, at the time of writing, its share price was up 52% from its February lows (prompting some brokers, such as Citi, to downgrade the stock to a sell for having run too hard). Are shareholders saying they love Li, or positioning for a hoped-for sale?

Li’s not moving either way. “We know Hong Kong,” he says. “We know China. We have a clear business strategy, and we are ready for all opportunities that lie ahead.”