Hong Kong Moves to Calm Depositors After Bank East Asia Rumors

Hong Kong Moves to Calm Depositors After Bank East Asia Rumors


Sept. 25 (Bloomberg) -- Hong Kong's government, regulators and richest man came to the aid of Bank Of East Asia Ltd. after ``malicious rumors'' about its financial stability spurred the city's first bank run in more than a decade.

Financial Secretary John Tsang said the rumors were ``unfounded'' and the bank has enough capital to serve its clients. Joseph Yam, head of Hong Kong's central bank, urged depositors to stay calm and pumped $500 million into the banking system. Li Ka-shing, chairman of Cheung Kong (Holdings) Ltd., bought the stock.

BEA's woes underline how a year of turmoil in financial markets has undermined confidence in the global banking system. Britain's government bailed out mortgage lender Northern Rock Plc last year after a run. The U.S. took over American International Group Inc., the nation's biggest insurer, this month to prevent the worst financial collapse in American history.

``Their exposure should be limited,'' said Mona Chung, a fund manager who helps oversee more than $2 billion at Daiwa Asset Management Ltd., referring to AIG and the collapse of Lehman Brothers Holdings Inc. ``The reaction to those rumors seems a bit exaggerated. This is probably a bigger problem in the U.S. than for local banks.''

BEA shares rose 3.6 percent at 11:55 a.m. in Hong Kong trading after slumping as much as 11 percent yesterday. Chairman David Li rushed back to Hong Kong from the U.S. late yesterday to reassure clients and investors, and said he's buying shares in the 90-year-old lender, the city's third-largest.

``The rumors were groundless,'' Li, 69, told reporters at Hong Kong's airport late yesterday. ``The bank has no problem.''

History of Crises

Lines outside BEA's branch on Des Voeux Road in the city's business district had dried up as of 11:30 a.m. today.

Hundreds of depositors lined up yesterday outside its branches in central Hong Kong, some of them to withdraw money. BEA issued a statement saying the rumors, spread by cell phone, were malicious and without basis and that its financial position is ``sound and stable.''

``While we believe the risk profile of BEA has increased as a result of today's events, the lack of fundamental basis for the deposit outflows makes us believe this crisis will pass relatively quickly with limited financial impact,'' Credit Suisse Group analysts Christopher Esson and Frances Feng said in a note dated today. They kept their ``outperform'' rating on the stock.

Hong Kong hasn't had a bank failure since the Hong Kong Monetary Authority was founded in 1993, though it has a long history of financial crises associated with its lenders. There was a brief run on Standard Chartered Plc and Citigroup Inc.'s local unit after the failure of BCCI Group in 1991, while the failure of a small Hong Kong bank in the 1980s triggered runs on rivals and led to efforts to strengthen regulation.

A banking crisis in 1965 prompted a government-backed takeover of Hang Seng Bank Ltd. by the Hongkong and Shanghai Banking Corp. for HK$51 million. HSBC Holdings Plc now owns 62 percent of Hang Seng, which has a market value of $36.5 billion.

Deposit Insurance Cap

Hong Kong's last bank run occurred in 1997, when International Bank of Asia suffered depositor withdrawals. On Nov. 11, 1997, the bank's then-Chief Executive Officer Mike Murad declared the run over.

Under Hong Kong's deposit insurance program, bank depositors are protected up to HK$100,000 in the case of a bank failure. The government is reviewing whether to raise the protection cap to HK$200,000. The Hong Kong Monetary Authority injected HK$3.88 billion ($500 million) into the banking system today, after the interbank lending rate surged yesterday.

``I'm here not because I'm worried but just because my check needs to be cashed today,'' a 52-year old woman who gave her surname as Chiu said outside the Des Voeux Road branch today. ``I trust David Li, I may follow him to buy shares in BEA.'' She said she's been a BEA customer for 15 years and has about HK$1 million of total assets with the bank.

Cheung Kong spokeswoman Winnie Cheong said Li bought BEA shares yesterday with his own funds, though she didn't know the size of his purchase.

Image Tarnished

BEA had HK$396.6 billion of assets as of June 30 and a capital adequacy ratio of 14.6 percent.

BEA's image was tarnished on Sept. 18 as it reduced first- half profit by HK$109 million because of ``manipulation'' of the valuation on equity derivatives it holds. The restatement prompted Moody's Investors Service and Standard & Poor's to say they may cut BEA's credit ratings.

Other banks moved to reassure the public about their finances. DBS Group Holdings Ltd., South East Asia's biggest lender by assets, said today its Hong Kong unit is ``in a strong financial and capital position.''

BEA's Li, a scion of one of Hong Kong's most prominent families, quit the city's cabinet in February after agreeing to pay $8.1 million in fines to the U.S. securities regulator for allegedly tipping off a friend about News Corp.'s takeover of Dow Jones & Co. Li agreed to pay the fine without admitting or denying wrongdoing.

BLOOMBERG