Insurance Australia Group (IAG), the largest car and home insurer in Australia, has signed a memorandum of understanding (MOU) to buy 24.9 per cent of China Pacific Property Insurance Company (CPIC Property).[newsphoto]

Malaysia's third largest bank Public Bank Bhd yesterday won the bid to buy the small Hong Kong banking arm of Asia Financial Holdings Ltd for HK$4.5 billion (US$577 million) in cash.

The purchase, called expensive by analysts, will give the Malaysian lender a modest footprint on the Chinese mainland and broaden its position in the saturated and fiercely competitive Hong Kong market, where its JCG arm takes deposits and offers other consumer finance services.

The deal, priced at 2.5 times Asia Commercial Bank's book value, is the most expensive Hong Kong bank sale since DBS Group Holdings paid 3.18 times book value for Dao Heng Bank in late 2001 and may set a tempting precedent for smaller family-run banks in the city that have long resisted consolidation.

The price is also much more than the US$460 million, or 2 times book value that the market had expected, and exceeds the entire US$488 million market capitalization of Asia Financial.

"I don't see why they would want to expand at this kind of multiple," said CLSA analyst Dominic Chan. "That (price) clearly would involve some huge EPS dilution at 2.5 times book value."

Hong Kong-listed JCG Holdings Ltd, which is about 64 per cent-owned by the Malaysian lender, was the winning bidder among nine finalists for Asia Commercial Bank, which has 12 Hong Kong branches and three mainland outlets.

Asia Financial, looking to focus on its insurance business, hired JP Morgan Chase & Co in 2005 to sell its bank.

In April 2005, Asia Financial teamed up with PICC Holdings Ltd, the parent of PICC Property and Casualty Co, Sumitomo Life Insurance and Bangkok Bank on a mainland life insurance joint venture. It is expected to invest proceeds from the bank sale into that business.

Big money

Asia Commercial is a bit player in a Hong Kong market dominated by HSBC Holdings Plc, Bank of China (Hong Kong), Standard Chartered Plc and Hang Seng Bank Ltd.

Public Bank's bid trumped that of the mainland's China Construction Bank Corp and Minsheng Banking Corp, both of which wanted Asia Commercial as a stepping-stone for overseas expansion.

"Some would say this is expensive because of the competitive environment but if you look at it as a controlling premium for a business franchise it shouldn't be expensive," said Chan Ken Yew, banking analyst with Kuala Lumpur-based OSK Securities.

"The purchase is positive for Public in the long run. And locally in Malaysia, the growth is somewhat saturated, so they need a growth path," Chan added.

Asia Commercial Bank has just HK$14 billion in total assets, well shy of the HK$47 billion minimum requirement for inclusion in an economic partnership between Hong Kong and Beijing that helps local lenders expand on the mainland, CLSA's Chan noted.

Jasmine Lai, a banking analyst at DBS, said she did not see much synergy for JCG from the deal.

CLSA's Chan said he expects JCG to issue 567 million new shares, or almost 79 per cent of its existing 720 million shares, to pay for the deal, resulting in a sharp earnings per share dilution of 24 per cent.

"If 2.5 times book valuebecomes the exit valuation for medium-sized banks, we see further upside on other smaller banks, where the average P/B (price-to-book value) is only 1.38 times, then we see further upside on the smaller banks," he said.

Other Hong Kong takeover targets include Liu Chong Hing Bank, which trades at one-time book value, Wing Lung Bank at about 1.45 times book, and Wing Hang Bank at about 2.05 times book, he said.

Shares in both Asia Financial and JCG were suspended yesterday. Shares of Asia Financial ended at HK$3.60 on Tuesday and have soared more than 90 per cent in the past three months in anticipation of a deal.

Shares in Public Bank rose 0.74 per cent on Wednesday to 6.80 ringgit.

(HK Edition 02/16/2006 page3)