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Morningstar | BOCHK Seeks Offshore Growth From the Acquisition of Bank of China's Southeast Asian Assets

Given its solid fundamentals and close connection with parent Bank of China, we see Bank of China Hong Kong, or BOCHK, as a key beneficiary of rising regional economic integration. BOCHK carved out a narrow economic moat because of cost advantage and switching costs in Hong Kong. As the second-largest bank in Hong Kong, it established a strong brand for its retail business with high-quality corporate clients.Due to its cross-border banking expertise and connections with its parent bank, the bank has amassed high-quality corporate customers from Hong Kong and mainland China, offering a full range of banking services. These competitive edges have rewarded the bank with a sticky deposit base, characterised by the second-largest market share in Hong Kong-dollar-denominated deposits. Both underpin the bank's funding advantage. The proven record of cost-control discipline and scale advantage also translates into a consistent industry-leading cost/income ratio.From its relationship with its parent, BOCHK has enjoyed policy preferences. The bank was the designated bank for Chinese-yuan-denominated transactions in Hong Kong and was the settlement bank for the Stock Connects in Hong Kong. The former positions the bank to benefit the burgeoning offshore renminbi business, or CNH. It dominates the fast-growing CNH deposit market and is a market leader in financial products denominated in Chinese yuan. However, the steady relaxation of the Chinese yuan and capital account should see other Chinese state-owned banks also benefiting.Furthermore, the relationship with its parents means that management's decision for BOCHK may be state-driven. Our concern rests with the potential asset injections of the parent's Southeast Asian assets into BOCHK. The bank acquired its Thai and Malaysian operations at the high end of valuation, in our view. However, the acquisition differentiates the bank from local Hong Kong peers with regional reach to capture long-term growth opportunities. The bank's risk profile will also increase as the bank expands its geography in Asia but a strong, historic underwriting standards and prudent balance sheet adds comfort.