Japan’s SMBC to double stake in Hong Kong bank

A woman enters a Sumitomo Mitsui Banking Corp branch in Tokyo. The Japanese bank plans to almost double its holding in Hong Kong’s Bank of East Asia by buying another $950mn of shares.

Dow Jones/Hong Kong

Japan’s Sumitomo Mitsui Banking Corp (SMBC) plans to almost double its holding in Bank of East Asia by buying another $950mn of shares in the Hong Kong lender, in a move that would help the Tokyo bank gain more access to the Chinese market.

Sumitomo Mitsui Banking Corp plans to increase its stake to 17.5% from 9.6%, subject to regulatory approvals, making it one of the biggest shareholders in Bank of East Asia. The move by Japan’s second largest bank by market capitalisation also marks the latest example of the country’s cash-rich lenders expanding their reach across the region.

The move would help Sumitomo Mitsui, which currently has about 16 branches in mainland China, offer services to their Japanese business clients in the world’s second largest economy, through Bank of East Asia’s vast network in the country. Bank of East Asia has about 120 branches in China.

Amid sluggish loan demand and nearly zero interest rates at home, Sumitomo Mitsui is ramping up efforts to expand its business in Asia, with the goal of becoming a leading financial group in the region. Its parent, Sumitomo Mitsui Financial Group, said in May that it aims to achieve a growth of more than 15% over the next three years in consolidated gross profit for its Asia operations outside Japan.

It took a minority stake in India’s Kotak Mahindra Bank in 2010. Among its high profile investments, it has a minority stake in India’s Kotak Mahindra Bank, a 15% stake in Vietnam Export Import Commercial Joint Stock Bank and a 40% holding in Indonesia’s PT Bank Tabungan Pensiunan Nasional. In August the Tokyo lender acquired a 12.25% stake in Cambodia’s largest lender by assets, Acleda Bank.

Bank of East Asia is one of the largest banks not based in mainland China to operate there. But that exposure to China’s slowing economy has prompted warnings from the lender of a spike in bad debts there.

Other stakeholders in the Hong Kong lender are Spanish lender CaixaBank SA, with a holding of 17.05%, and Guoco Group, a conglomerate controlled by Malaysian tycoon Quek Leng Chan, with a 15% stake.

Banking in Hong Kong is dominated by the likes of HSBC Holdings and Standard Chartered. Competition from other lenders is pressuring profits at smaller banks and triggering consolidation.

Hong Kong’s banks face other risks, too. The yuan’s surprising depreciation this year threw a spotlight onto a sharp increase in lending into China by Hong Kong banks, especially to clients trying to profit from the difference in interest rates between Hong Kong and the mainland, where rates are higher.

Closer to home, Hong Kong lenders are also vulnerable to a correction in the city’s home prices, which have cooled in recent quarters as the government applied tools, such as a tax on foreign buyers, to ease demand. Before the launch of that tax in late 2012, prices had risen 120% since 2008.