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OCBC makes HK$38.4b offer for Wing Hang Bank

Some analysts say the deal's price and capital structure are in line with expectations

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Bank's view: It's a fair deal for the selling shareholders as well as the acquiring entity, says Mr Tsien (right), seen here with OCBC chief financial officer Darren Tan

[SINGAPORE] The market perked up slightly on OCBC Bank's lower-than-expected conditional offer for Hong Kong's Wing Hang Bank yesterday, with the Singapore lender's shares closing five cents or 0.53 per cent higher at $9.56. OCBC is offering HK$125 in cash for each Wing Hang share, which comes up to HK$38.43 billion (S$6.23 billion) in total - lower than the S$6.7 billion estimated by the Street.

Even so, this deal is the largest by a local bank since DBS's US$5.8 billion purchase of Hong Kong's Dao Heng Bank in 2001. The addition of Wing Hang to its pockets will be accretive to OCBC's earnings per share and return on equity by 2017, the bank said. On a pro-forma basis, Wing Hang would have increased the full-year pre-tax contribution from Greater China to OCBC from 6 per cent to 16 per cent in 2013, post-acquisition.

Wing Hang's founding Fung family, their affiliates, related family trusts and BNY International Financing Corporation have agreed to sell a total of 44.79 per cent of Wing Hang shares to OCBC. Commitments from other Wing Hang shareholders will bring OCBC's share of the bank to 50.66 per cent.

If OCBC is able to acquire 100 per cent of Wing Hang, the former intends to delist it from the Hong Kong Stock Exchange, Group CEO Samuel Tsien said at a media briefing yesterday. Standard & Poor's said yesterday that it had affirmed its AA- long-term and A-1+ short-term issuer credit ratings on OCBC.

"We affirmed the rating because we believe OCBC's financial profile will remain unaffected despite the bank's proposed acquisition of Hong Kong-based Wing Hang Bank Ltd," said Standard & Poor's credit analyst Chris Lee.

OCBC's counter took a beating earlier this year when the market expected a pricier deal. From $10.18 at the start of 2014, it had shed almost 11 per cent to $9.09 by February.

Asked about OCBC's offer being lower than expected, Mr Tsien said that he believes that the offer price is "fair and equitable".

"It recognises the value that Wing Hang has in this franchise and . . . we think it's a fair deal for the selling shareholders as well as the acquiring entity," he said.

Wing Hang's counter closed 20 cents or 0.16 per cent higher at HK$123.20 yesterday.

The deal will be funded through a mix of internal resources, new debt and equity capital. It will also be OCBC's first purchase which involves funding through equity, in a departure from its previous acquisitions or investments.

"We have the opportunity to acquire the entire issued share capital of Wing Hang, so as a result of that, from a prudent capital management perspective, it is right for us to look at a funding plan that involves both debt and equity," Mr Tsien said. How much OCBC will raise depends on the outcome of its general offer for Wing Hang. "It is our intention to make sure that our capital adequacy will always be at a prudent level with a sufficient cushion above the regulatory minimum," Mr Tsien added.

He also said that OCBC does not envisage selling its stake in Great Eastern Holdings to raise funds for this purchase. The acquisition is expected to lower OCBC's total capital adequacy ratio from 16.3 per cent to 12.5 per cent, before any capital raising.

For some analysts, the deal's price and capital structure were in line with expectations, with the offer translating to a price-to-book ratio of 1.77.

"Investors may be relieved that pricing is reasonable . . . and did not resort to financing engineering (such as allowing Wing Hang shareholders to receive special dividend prior to acquisition) to seal the deal," said UOB Kay Hian analyst Jonathan Koh in a note yesterday.

Even so, Phillip Securities Research's Benjamin Ong noted: "At a price-to-book ratio of 1.77, there's still a premium attached for strategic control of a mid-sized bank, especially if we strip out Wing Hang's final dividend from the book value, as well as the property revaluation reserve. So, in fact, the offer value is about 2.02 times, price-to-book."

This deal will be more than just a way for OCBC to gain better access to mainland China - it will be a way for OCBC to capitalise on the money moving between North Asia and South-east Asia, said Mr Tsien.

"The flows that we are seeing (between the two regions) - the US$600 billion trade flow, the US$11 billion investment flow in 2013 alone - it's a big market that only regional banks will be able to tap into," he said. At the same time, Wing Hang's presence in Hong Kong and Macau will give OCBC a shot at the offshore renminbi (RMB) market. "It is the market that we have to access. I need that base in order to build further into offshore RMB products," Mr Tsien said.

On top of that, OCBC will have access to a wider pool of affluent retail customers to whom it can cross-sell wealth management products, he added. Even so, other facets of Wing Hang's exposure have given some market-watchers pause.

"Hong Kong residential mortgage and China loans together accounted for 38 per cent of Wing Hang Bank's loan book. We are concerned about this exposure as Hong Kong property prices are declining and cases of mainland bond defaults are increasing," said Krishna Guha, an equity analyst with Jefferies Singapore. "While Wing Hang's (loan-to-deposit ratio) may be raised from the current 76 per cent, we think the current credit cycle warrants some caution. Also, given potential interest rate liberalisation, we doubt if the combined entity would have any funding advantage."

This offer is conditional on regulatory approval and on OCBC getting acceptances that amount to more than 50 per cent of Wing Hang shares, among other things. Preliminarily, regulatory approvals for the deal and the dispatch of the offer document are likely to take place by June, with the offer closing by August.

If the deal goes through, OCBC will keep the employees of Wing Hang and its subsidiaries on for at least the following 18 months.

Where integration of operations between the two entities was concerned, Mr Tsien was optimistic. "There is definitely cultural fit between the two organisations of OCBC and Wing Hang," he said.