Hong Kong banks will benefit from the territory's recently signed free trade agreement with China, making them more attractive to overseas suitors seeking prospective mergers and acquisitions, international accounting firm KPMG said yesterday.
KPMG partner-in-charge for financial services, Steve Roder, said the Closer Economic Partnership Arrangement (CEPA) will provide a boost to the Hong Kong economy, which in turn would bring benefits to the local banking sector.
The prospect of Hong Kong banks being able do yuan personal banking businesses will earn them fees from processing such transactions and make up for shortfalls in fee income due to the lower levels of Hong Kong dollar activity, he said.
Even prior to CEPA, there had always been a lot of bidders, including overseas ones, for banks in Hong Kong, Roder said.
"There have been a lot of discussions in the public domain about merger and acquisitions. The only problem is that there is a lack of results from those discussions," he said.
However, Roder said he expects these discussions to intensify as local and Chinese authorities issue more clarifications about the definition of Hong Kong banks.
Under the preliminary provisions of CEPA, the minimum asset requirement for Hong Kong banks to open branches in China will be lowered to US$6.0 billion from the current US$20 billion.
Additionally, when applying for a yuan license in China, the minimum profitability track records Hong Kong banks require will be shortened to two years from three and no longer be on a per-branch basis, but on a "pooling" basis.
Roder said CEPA will intensify the economic integration between Hong Kong and China and create more reason for Chinese banks to strengthen ties with those in Hong Kong through collaboration, acquisition of strategic stakes or affiliations in various forms.
As for foreign institutions, Roder said local banks remained attractive acquisition targets because of the present cheap valuations and the fact Hong Kong is still considered a stepping stone to expand into China.
KPMG partner for financial services Martin Wardle said corporate loans and overall asset quality of banks in Hong Kong stayed robust last year and the first half of this year, despite the very low level of economic activity and the outbreak of SARS.
"The corporate book remains relatively benign and hasn't been significantly affected by SARS," he said.
Wardle said the asset quality of the sector as a whole is strong with non-performing loans more than 35 percent covered with loan-loss provisions and the rest with collateral.
Wardle also said that he expects the sector to see some write-backs of provisions as the macroeconomic situation in Hong Kong picks up.
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