OCBC's bid for HK's Wing Hang raises valuation, funding concerns

Singapore OCBC's bid to take over Hong Kong's Wing Hang Bank in a deal estimated at US$5.3 billion has raised concerns it may be paying too much for a mid-sized bank and will be tapping shareholders to fund the acquisition. -- ST FILE PHOTO: KUA CHEE
Singapore OCBC's bid to take over Hong Kong's Wing Hang Bank in a deal estimated at US$5.3 billion has raised concerns it may be paying too much for a mid-sized bank and will be tapping shareholders to fund the acquisition. -- ST FILE PHOTO: KUA CHEE SIONG

SINGAPORE (Reuters) - Singapore OCBC's bid to take over Hong Kong's Wing Hang Bank in a deal estimated at US$5.3 billion has raised concerns it may be paying too much for a mid-sized bank and will be tapping shareholders to fund the acquisition.

Oversea-Chinese Banking Corp, Singapore's second-biggest bank, has begun exclusive talks with Wing Hang, offering nearly twice the Hong Kong lender's book value, two people familiar with the deal told Reuters on Friday.

Shares of OCBC fell as much as 1.9 per cent in early trading on Monday before a trading halt was imposed at the bank's request. Trade in Wing Hang's shares were also suspended at its request. They last changed hands down 1.4 per cent.

While an acquisition of Wing Hang would give OCBC a gateway into mainland China and help bridge the gap with DBS Group Holdings, which operates Hong Kong's fifth-biggest bank Dao Heng, UBS analysts say the deal would require "sizeable capital raising" by OCBC and would likely be dilutive for shareholders.

Generating good returns will also not be easy.

"Historically acquirers of banks in Hong Kong have struggled to make a decent return on capital deployed," UBS analysts Stephen Andrews and Khairul Rifaie wrote on Monday as they cut OCBC's 12-month target price to $10.90 from $11.30.

DBS has also struggled with its expensive acquisition in 2001 when it paid 3.34 times for Dao Heng in a US$5.8 billion deal. That deal forced DBS to take big writedowns in 2005 and in 2010 to reflect the market value of the bank's struggling Hong Kong business.

Analysts also note that OCBC is buying a bank that generates inferior returns and whose balance sheet is less fortified than its own.

OCBC had 10.6 per cent return on equity and core Tier 1 capital of 14.3 per cent, compared to Wing Hang's 9.2 per cent ROE and 10.8 per cent Tier 1 capital ratio.

UBS, however, noted that a deal for Wing Hang would boost OCBC's Greater China exposure to 25 per cent of its loan book versus 15 per cent currently and to around 13-14 per cent of its profit after tax versus 5 per cent now.

Wing Hang said in September that its biggest shareholders had received preliminary offers from unnamed independent third parties, putting the bank in play. Hong Kong's Fung family and BNY International Financing Corp are the biggest shareholders with a combined 45 per cent stake.

Reuters previouly reported that the sale process had attracted interest from suitors including Agricultural Bank of China, Australia and New Zealand Banking Group and Singapore's United Overseas Bank.

But Wing Hang's high price expectations prompted many to drop out of the auction.

"There are some concerns that OCBC might overpay for the acquisition. Whether or not OCBC wins the bid, markets seem to be first selling on the bid news," said a trader at a bank in Singapore.

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