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A war of words has broken out between The Bank of East Asia, the Hong Kong-headquartered group, and a prominent shareholder activist demanding that the bank should be sold. BEA provides private banking and wealth services among its offerings.

A group called Elliott, which has built a 7 per cent stake in BEA, said in a note yesterday that the “BEA board should now finally focus on delivering proper value for BEA shareholders by conducting an auction process to explore the scope for a sale of BEA at an appropriate premium.”

Elliott, in its list of complaints about Hong Kong’s third-largest bank, said: “Shareholders have long suffered from BEA’s entrenched executive management, which has mismanaged the business, resulting in weak underlying financial and operating performance and poor returns for independent minority shareholders.”

BEA trades on a price/earnings multiple of 8.29 times earnings, below a financial sector average of 12.9 (source: Reuters). The share price is near a 52-week low of HK$20.95 (the 52-week high is HK$35.85 per share.) On a linear scale of 1-5, there is a mean analysts’ rating of 3.75. There are no analysts, according to a recent Reuters poll, who have a buy rating on BEA, but three have given it a sell rating.

The bank rejected Elliott’s argument.

“Over the recent months, Elliott has been building a stake in the Bank of East Asia for the purpose of trying to push the bank into play. This action is further to a previous failed attempt to realise short-term gains in the Hong Kong banking sector. The market has seen these tactics by Elliott before, and we believe their actions towards BEA demonstrate self-interest rather than the best interests of all shareholders,” the bank said in a statement emailed to this publication.

“Elliott’s stance appears very short-term focused and it takes no account of the long-term, sustainable business that the bank is building. Their letter is fundamentally inconsistent; they pointedly reference the attractiveness of the bank’s scale and profile of the banking platform, while at the same time encouraging shareholders to urge a sale of the bank in a challenging market environment,” it said.

Responding later to the BEA statement, Elliott - which has created a special website for its campaign against the bank - said: "We note the entirely predictable response from BEA’s long-entrenched board, which seemingly continues to refuse to acknowledge management's failure to address the company’s underperformance. How much longer must long-suffering shareholders, big and small, put up with such poor excuses for poor performance? The board seems fixated with independence at the expense of shareholders' returns."

In its letter to shareholders, Elliott’s criticisms of BEA included an alleged “serial usage of the general mandate to place new shares on a selective basis to CaixaBank and SMBC for `strategic’ purposes [which] has assisted in entrenching the incumbent management and led to BEA’s chronic underperformance". Elliott said there is “scope to sell BEA at an appropriate premium” and that, historically, Hong Kong bank sales have fetched a price of two times book value, which would equate to around HK60 per share, or 185 per cent more than the existing share price.

The activist also claims that despite “poor” performance and corporate governance, the scale and profile of BEA’s banking platform is attractive to any potential acquirer.

Founded in 1977, Elliott manages two funds, Elliott Associates and Elliott International, and has a total of $26 billion of funds under management.