Hedge Fund Elliott Seizes on Bank of East Asia Profit Slide

(Bloomberg) -- Billionaire Paul Singer’s Elliott Management seized on Bank of East Asia Ltd.’s 38 percent slump in first-half profit as more ammunition for its campaign to loosen the Li family’s grip on one of Hong Kong’s last independently-owned listed lenders.

Hedge Fund Elliott Seizes on Bank of East Asia Profit Slide

Paul Singer

Photographer: Jacob Kepler/Bloomberg

The result underscores “BEA’s chronically poor performance and Elliott’s views concerning the inability of an entrenched executive management team to deliver proper value to BEA shareholders,” a spokesman said Friday after the bank reported its fourth consecutive decline in half-yearly profit.

Elliott called six months ago for the bank to explore a sale of itself and ratcheted up its campaign by filing legal proceedings in July. The fund says that the lender, one of only two remaining independent banks listed in Hong Kong, acted improperly when issuing shares that diluted minority shareholders and allegedly entrenched management control.

The poor results have interrupted a rally in BEA shares that was driven by Elliott’s battle with BEA Chairman David Li and his board. The stock has fallen 4.3 percent since the earnings, putting it on course for the biggest two-day slump in more than three months and paring its gains from a seven-year low in February to 53 percent.

On Monday, the shares dropped 1.4 percent as of the midday trading break in Hong Kong to HK$32. Macquarie Group Ltd. downgraded BEA to underperform from neutral in an Aug. 19 report, citing a “weak operational outlook.”

At a press briefing after the result, Li called Elliott’s allegations “baseless” and said the fund was acting for its own purposes and against shareholder interests. The fund’s legal petition would have no “material adverse impact,” Li said, reiterating that the bank will “vigorously oppose” the action.

Hedge Fund Elliott Seizes on Bank of East Asia Profit Slide

David Li

Photogrpaher: Xaume Olleros/Bloomberg

The petition “is yet another attempt to put the bank into play and force a sale,” Li said. “We have heard Elliott’s arguments before. Their tactics only seek to serve their own short-term self-interest.”

Hedge Fund Elliott Seizes on Bank of East Asia Profit Slide

The first court hearing is scheduled for Sept. 21.

In its petition, Elliott is seeking rulings including that board resolutions connected with the lender’s sale of new shares to Japan’s Sumitomo Mitsui Banking Corp., completed in March last year, were “passed for an improper purpose.” The fund is also asking the court to release the Japanese firm and Criteria Caixa SA -- the parent of Spain’s CaixaBank SA -- from any undertakings that restrict them from boosting or cutting their stakes.

BEA’s profit slump came as loan impairments surged 60 percent from a year earlier to HK$1.24 billion ($160 million). Deputy Chief Executive Officer Brian Li said that while he was “cautiously optimistic” on nonperforming loans in China, it was hard to say if the worst was over.

“We are not immune from China’s worsening bad-loan situation even though the growth of our gross nonperforming loan formation has slowed,” Li said.

The bank’s impaired-loan ratio increased to 1.23 percent at the end of June from 1.13 percent as of Dec. 31, with the ratio for its China business jumping to 2.8 percent from 2.63 percent.