The battle for Bank of East Asia
Elliott Management’s court case against Sir David Li’s Bank of East Asia pits the aggressive new world of activist investment against one of Hong Kong’s most venerable institutions. The stakes are high, and the rhetoric tough.
By Eric Ellis
As the lift in Bank of East Asia’s headquarters in the heart of Hong Kong’s Central financial district zooms Asiamoney to a luncheon hosted by its executive chairman, Sir David Li Kwok-po, the presenter on the internal Bloomberg monitor enthuses that “share prices are hitting new highs.”
Unfortunately for our 78-year-old host – who in the twilight of a long banking career is facing the battle of his life to maintain the independence of the bank his great-uncle founded in 1918 – the excitable anchorman has not included the BEA share price in his bulletin.
Though BEA boasts one of the most extensive branch networks in international banking’s much-coveted Chinese market, built on the back of BEA’s century-old franchise in Hong Kong, the highest recent point that BEA’s share price has reached was nearly a decade ago, on December 7, 2007. Compare that with BEA’s main Hong Kong competitor, Hang Seng Bank, which hit a historic high as recently as June 2 this year.
Which is one of the many reasons why New York-based hedge fund Elliott Management Corporation, through its UK arm Elliott Advisors, is waging a hostile campaign targeting BEA and Sir David’s stewardship in particular. The vehicle of billionaire investor Paul Singer, Elliott owns around 7% of BEA, a stake valued at just shy of $1 billion.
Often condemned by critics as a predatory vulture fund, Elliott claims BEA is a chronic under-performer, poorly managed and functioning as a private fiefdom for Sir David. Elliott says BEA has been a vehicle to help Sir David to advance his political and social influence in Hong Kong and China at the expense of what Elliott describes as its long-suffering shareholders.
As the two sides again lawyer up to face each other in Hong Kong’s High Court in July, Elliott says the best thing Sir David can do for BEA’s shareholders is to put the bank up for sale. It reckons Sir David could then bow out of a banking career as a billionaire, with two, even three, times BEA’s current book value, and everyone would win, not least Elliott.
As a marker, Elliott insiders point to the 2015 sale by Bank of China of the smaller Nanyang Commercial Bank to China Cinda Asset Management, controlled by Beijing’s Ministry of Finance. Nanyang sold for HK$68 billion ($8.7 billion), and almost twice its book value. In 2014, Singapore’s OCBC bought the smaller-still Hong Kong bank Wing Hang for almost $5 billion, or twice book value. But those two banks had nothing like the reach BEA has in China.
That all might sound like a neat and profitable plan by Elliott, famous – even notorious – for its aggressive plays on defaulted sovereign debt in Argentina and Congo. And it might suit BEA’s eclectic cast of prominent shareholders like Japan’s Sumitomo Mitsui Bank (19%), Spain’s Caixa group (17%) and Malaysia’s Guoco Group (14%), not to mention the wider Li clan (up to 10%) themselves, except for one critical thing. Sir David is determined it should never happen.
|Bank of East Asia’s executive chairman Sir David Li Kwok-po
Sir David says he has received many approaches for BEA over his 36 years as its chief executive, but has never been tempted.
“Not once!” he says firmly. “Stay true to the cause!” Sir David says that he has defended BEA from three hostile takeover bids, a remark his corporate communications team later clarified when pressed, saying: “In the time that Dr Li has been CEO/director of the bank, no one has notified the board of a firm intention to make an offer to the bank’s shareholders.”
The bank’s spokesperson says: “Dr Li does not have an independent strategy. It is important to note that it is not the sole decision of Dr Li to decide whether the bank should be disposed or not. It is entirely up to the board of the bank to decide.”
Founded in 1918, Bank of East Asia is often referred to as the last of Hong Kong’s independent banks. It’s a term that also suggests that may not be the case for much longer.
“I consider (the term) a compliment, definitely,” Sir David says. “People have trust in us more than other foreign banks.”
If the seven-year arm wrestle with Elliott has distressed Sir David, it doesn’t much show. At the lunch for Asiamoney in BEA’s banquet room, the London-born and Cambridge-educated Sir David is courtliness personified. The food is sumptuous and Sir David is a gracious host. With ambassadorial charm, he keeps the table chatter briskly ticking along, the eclectic discussion informed and on point but never too demanding or dogmatic.
This is old-style establishment Hong Kong, in the court of one of the territory’s famous four great families. Here the corporate going can get bruising at times, but manners matter.
The dishes cleared away, Sir David leaves it up to his 42-year-old son Brian who – like Sir David’s eldest son Adrian, is a co-executive director at BEA and heir-presumptive of the Li legacy – to make BEA’s case for independence and against Elliott.
Brian Li, BEA
Shareholder activism is relatively unknown in Hong Kong. Brian Li claims the board welcomes constructive scrutiny, but it’s clear the Li family regards Elliott’s tactics as distasteful and intrusive.
“Their style is very confrontational, very aggressive,” Brian Li says. “It is wrong for Elliot to criticize us. They are opportunistic, their purpose is very self-serving. These guys are there only for themselves. Their sole objective is to sell the bank.”
Brian Li is responsible for BEA’s China operation. Perhaps channelling his father, Li apologizes for being late, explaining he had been juggling Mother’s Day commitments with matters of state in Beijing. As if to underline the depth of the Li connections, he says he has just returned from the Belt and Road conference in Beijing where president Xi Jinping mapped a vision to transform international commerce, with China at its core. It provides a chance for Li to lavishly praise Xi and contrast an outward-looking China with the US, which Li says is in chaos under president Donald Trump.
“I think the Chinese government likes us because we have been a very long-term investor,” he says. “That we have been independent has helped us build a business in China. I do believe they look at us in a different way.”
Bank of East Asia is present in 40 Chinese cities. “We are in many of the tier-one and two cities, and even tier-three cities,” Li says. Its 116 branches and sub-branches in most of China’s provincial capitals are the second-biggest foreign bank presence after HSBC in a country that’s not disposed to handing foreigners banking licences.
“Even mainland banks 10 times bigger than us in terms of assets don’t have this type of network,” says Li. “We can serve customers beyond their province, and we can cherry-pick the customers more selectively.”
Tough across border
Elliott acknowledges that BEA has built an attractive network, albeit one it claims is not very well managed.
“We thought it was a very good platform,” says an Elliott insider. “Hong Kong banking licences are very valuable because Chinese banking is opening up through Hong Kong, so a branch network in China becomes a lot more valuable. There’s only a handful of nationwide banks, which are not for sale anyway, and it’s a controlled situation there because they’re owned by the government.”
BEA vs Hang Seng Index: based to 100, 2007 to 2017 YTD
BEA has $30 billion in assets in China, Brian Li says, representing about a third of the bank’s total. Most of the assets are in Hong Kong, where BEA is a relative minnow compared with HSBC, Hang Seng Bank, Standard Chartered and Bank of China.
“We’ve been through various cycles in China but we are there, good and bad,” says Li. “The business has a lot of potential. Our vision in China is not shared by any of our local peers.”
But things have been tough across the border. In February this year, BEA announced a 33% decline in profit to HK$3.83 billion for 2016. BEA says its mainland China operations made a loss of HK$461 million in the year, revealing that the non-performing loan ratio had risen to 2.87%, compared with an average NPL ratio of 1.7% in China.
“China is not easy,” says Li. “Banking is not easy, all the more reason why we need to be really focused on executing our business plan. The last two years, we have suffered from the economic slowdown in China. I keep telling investors that the time ahead will still be difficult, but we are quite hopeful the performance will be stronger in China this year.”
Li says BEA banks China’s medium-to-large corporations in their heartland. It likes customers in the healthcare and energy sectors, and is less keen on hotels and steel producers. “We have a large exposure to property,” he says.
As for its independence, he says: “There is a lot of value that you can attach to an independent bank in Hong Kong. I think Hong Kong deserves to have a bank that represents Hong Kong.”
Mention Elliott and the mild-mannered Brian Li bristles.
“They are doing this at a time when the business is in a down cycle,” he says. “They can claim to put on a corporate governance front, but why would you be increasing your stake if you think the corporate governance is so bad?”
“We don’t want to be independent just for the sake of independence,” he says. “We think a sale would destroy the franchise. The board has considered this and we believe this is not in the long-term interests of all our shareholders, especially at a time when China is not doing well.”
Brian Li is particularly offended at – and seems somewhat suspicious of – the passionate discussions about BEA and the Li family’s record that are being debated anonymously online.
“I don’t know who is doing this,” he says. “And I’m not saying Elliott is doing this, but there was an online offensive on us, in the shadows. These kinds of things are very detrimental, nasty.”
Elliott denies pouring online kerosene into the fiery forums where BEA and the Li management are discussed, but an Elliott insider acknowledges it has seen the activity. “This [BEA] is a bank which is not popular among Hongkongers,” the insider says.
Li claims Elliott “uses the media to blow things out of proportion.” And Elliott also has transparency issues, ironic given that it has presented itself in the BEA battle as holding an activist torch to BEA’s proverbial belly on transparency and governance.
Unlike BEA, Elliott officials refused to talk openly with Asiamoney. Elliott instead has made much of its case via its website fairdealforbea.com, but every engagement with Elliott for this article, via their public relations adviser Newgate Communications, came with conditions and caveats before agreeing to proceed.
When Asiamoney asked BEA and Elliott if they had ever met each other to professionally thrash out their differences, Elliott declined to comment. But BEA readily admitted meeting Elliott.
“We have met with them, they came to us quite early on,” Brian Li told Asiamoney. A later statement from BEA elaborated: “Messrs Adrian Li, Brian Li and (chief investment officer) Samson Li met with (Elliott managing director) Mr James Smith and his team in the BEA office in December 2014. The board and senior management of the bank welcome meetings with shareholders, including Elliott, as appropriate.”
Elliott cites legal sensitivities as the reason for its reticence. In July, the two sides will again confront each other in Hong Kong’s High Court, as BEA seeks to strike out an Elliott petition that has claimed recent BEA placements of new stock to Sumitomo Mitsui and Caixa Bank were “passed for an improper purpose.”
If Elliott’s petition is successful, the court could remove the restrictions that currently prevent Sumitomo Mitsui and Caixa from adjusting their stakes without BEA approval.
In a written response to Asiamoney, Elliott says: “BEA has been mismanaged for 20 years – enough is enough for the independent shareholders. We call on the board of BEA to release CaixaBank and SMBC (Sumitomo) from all remaining contractual restrictions as regards their shareholdings in BEA and begin an auction process to explore the scope for a sale of the bank at an appropriate premium.”
Paul Singer, founder of Elliott Management
It goes on: “Management has failed to deliver for shareholders over a long period of time and appear to be completely unfamiliar with having to account and be properly answerable to shareholders for their actions. Management would avoid confrontation by dealing fairly and openly with shareholders and discharging their responsibilities properly.”
Representatives of both Sumitomo Mitsui and Caixa sit on BEA’s board alongside various Hong Kong establishment luminaries, and they have all strongly backed Sir David’s independence stance.
The Guoco group, owned by Malaysia’s Quek clan of Hong Leong fame, has been less supportive of the Li family. Guoco is part-owned by Elliott, which denies it is a concert party with Guoco in the BEA agitation.
Caixa’s stake in BEA is held by its Barcelona-based holding company CriteriaCaixa. Dr Li sits on the CriteriaCaixa’s international advisory council, and CriteriaCaixa’s chairman Isidro Fainé sits on BEA’s main board.
In a written statement to Asiamoney, CriteriaCaixa says it invests in “well-managed companies and leaders in their respective sectors”, adding that its 10-year-old investment in BEA “is entirely consistent with this investment approach.”
Apart from CaixaBank and BEA, the only other banking investment in CriteriaCaixa’s published portfolio is a 9% stake in Mexico’s Grupo Financiero Inbursa.
“The investment in BEA helps CriteriaCaixa to diversify its financial investments, and in the process improve its credit quality,” it says, adding that it considers “BEA to be a sound bank with high asset quality and a solid strategy. CriteriaCaixa is comfortable and satisfied with its current holding.”
CriteriaCaixa did not respond to Asiamoney’s request to quantify its return on its BEA investment over the 10 years of its holding.
For his part, Sir David says Caixa has been an excellent shareholder. “They are very active, and they are very good with social welfare as well.”
Sumitomo Mitsui, which is represented on the BEA board by storied Japanese banker, 72-year-old Masayuki Oku, did not respond. An old friend of Sir David, Oku was recently re-appointed for another BEA term that expires in 2019.
As the market fizzes with rumours that the Li clan have been sounding out support in China for a large Chinese bank or state institution to become a big shareholder in BEA, how does the Elliott stand-off get resolved?
“I don’t see how we can accommodate their wish,” Brian Li tells Asiamoney. “This may be wishful thinking, but when the business starts to turn around and the share price reflects the long-term value of the bank, then they will see that they can make some money and then they will go away.”
|Sir David Li and sons: Adrian (left) and Brian
He adds: “I think they are very gung-ho just about their wish to sell the bank. It’s unfortunate because it’s distracting. Our board is very principled. They don’t tend to compromise because there’s an easy way out. They will do what is right. Our response is to fight this vigorously.”
But can he count on continued support from Caixa and Sumitomo Mitsui? “They have been shareholders for a long time,” Li says. “They know what we’re doing very well. We’re cooperating with them at a number of levels; they are referring good customers to us. I think they can see how we can collaborate together, how to channel customers from Spain to China, and from China to Europe.”
Sir David has been BEA’s chief executive since 1981 and chairman since 1997. In 2014, his employment contract was extended to March next year, and he has never given any indication he will step down.
For all his evident charm, Sir David has been a controversial figure. In 2008, he paid $8.1 million to settle a US Securities and Exchange Commission investigation into alleged insider dealing by Li associates in the lead-up to a takeover bid for US publisher Dow Jones, where Sir David was a board member. Sir David denied culpability and stood down from the Hong Kong government’s prestigious Executive Council of advisers soon after.
And last year, Sir David was briefly embroiled in the corruption trial of former Hong Kong chief executive Donald Tsang. Sir David was campaign manager and chief fundraiser in Tsang’s successful election campaign in 2005 and his re-election in 2007.
BEA confirms that Sir David owns just 3.6% of BEA: his stake now consists of some 99.3 million shares, up from 72.2 million shares on January 1, 2015. At current market prices, which were hovering around HK$33 in early June this year, Dr Li’s BEA stake is worth $420 million.
That’s a good-sized number but, as an Elliott insider who has met him puts it, “he’s not a billionaire like many of his business peers in Hong Kong, and that would bother him. If he doesn’t run the bank, what is he?” With its cut-off point of $1 billion, Forbes couldn’t find a place for Sir David on its recent Hong Kong Rich List. The magazine last year put Paul Singer’s fortune at $2.6 billion.
Elliott charges that Li has been able to steadily increase his personal BEA holding while the stakes held by BEA’s independent shareholders have been diluted by 23% since 1997. An Elliott insider says the Sumitomo Mitsui placement in 2015 was made as a defensive gesture to counter Elliott.
“This is when we decided this was too much,” the insider says. “It fitted a pattern of behaviour. They are the only bank in Hong Kong that does this type of placement. The ownership structure is not sustainable.”
In an official response to Asiamoney, Elliott says: “Clearly, we are frustrated about underperformance at the bank over many years under its current leadership and the steps management has taken which have seriously impaired shareholder returns. We believe, however, that with a different leadership and management team, the bank could perform well and provide shareholders with a good return on their investments.”
Elliott is well known for playing a long game on its investments: the Argentinian bond deadlock lasted more than 15 years; Elliott eventually made a profitable exit for the fund, a pay-off that infuriated the newly installed Mauricio Macri administration in Buenos Aires.
Elliott has been building its BEA stake for around seven years. Elliott refuses to reveal its average entry price, but BEA shares have traded from HK$26.70 in early 2010 to a current HK$33. The Elliott insider says that of the many plays the fund is making around the world, BEA is one of the poorest performers in its portfolio.
But that should not be read as meaning Elliott is likely to give up its efforts to force a sale of BEA. If it’s the unstoppable force, does that mean eventually BEA is no longer an immovable obstruction?
Asiamoney asks Brian Li if he and his brother Adrian are as determined as their father to keep BEA in Li family control.
“I share the vision of my father, but to fulfil that vision we will have to keep changing our strategy,” Brian Li says. “At different times, we’ll have different strategies. Never say never.”
He says his father is not jealous about independence but believes that it’s a sound business approach. “We are not a bank that neglects our shareholders. We are not a bank that does not pay attention to corporate governance,” he says.
Elliott begs to differ, as it waits and waits and waits some more for its champagne-popping moment with BEA. And what is that? “When someone bids for the bank,” says the insider. And with the multiples being touted for China banks, that could also be a sparkling time for the Li clan too.