OCBC in exclusive talks to acquire HK bank

[SINGAPORE] OCBC Bank has entered into exclusive talks to take over Hong Kong's Wing Hang Bank, in a deal estimated to be worth around $5.8 billion.

The Singapore lender announced the exclusive arrangement yesterday evening, in response to news reports late last week and over the weekend that it had made a binding bid for Hong Kong's family-run Wing Hang Bank.

But OCBC chose to keep mum over details of the acquisition, such as the offer price, a move which would do little to calm the nerves of investors who have offloaded the bank's shares on valuation concerns.

OCBC shares fell as much as 1.9 per cent in early trading yesterday, before the bank asked for a trading halt at 10.25am. The counter last traded at $9.87. It will resume trading today.

Valuation concerns aside, the deal, should it go through, will give OCBC its first real substantial presence in Hong Kong's lending market, significantly enlarge its Greater China footprint and enable it to build up its offshore yuan business.

It would also mark the largest purchase by a Singapore bank since DBS Bank bought Hong Kong's Dao Heng Bank for US$5.8 billion in 2001.

In a statement yesterday evening, OCBC said it had "on Dec 31, 2013, entered into an exclusivity agreement with the substantial shareholders of Wing Hang, being members of the Fung family and their affiliates and related family trusts, and BNY International Financing Corporation (BNY IFC)".

Wing Hang is one of four remaining family-owned banks in Hong Kong; it is 45 per cent controlled by the Fung family and BNY IFC.

OCBC said the exclusivity agreement stated that Wing Hang's substantial shareholders "have agreed that, until Jan 31, 2014, they will engage exclusively with OCBC to seek to finalise the terms for a possible transaction, which would, should it proceed, involve OCBC making a general offer for all the shares of Wing Hang Bank".

OCBC added that no binding offer had been made at this stage, and that any possible offer would still be subject to regulatory approval.

A Bloomberg news report last week cited two unnamed people with knowledge of the deal as saying that OCBC had conducted due diligence and made Wing Hang an offer that was less than the two times book value the Hong Kong bank was seeking.

Wing Hang has a market value of US$4.6 billion, which is 1.7 times its estimated 2013 book value, according to data compiled by Bloomberg.

UBS analysts said the deal would require "sizeable capital raising" by OCBC and likely be dilutive for shareholders. They cut their 12-month target price for the bank to $10.90 from $11.30, saying that "historically, acquirers of banks in Hong Kong have struggled to make a decent return on capital deployed".

But DMG & Partners Research felt that the rumoured offer price, "while not cheap, appears palatable relative to a recent M&A transaction there".

"We think a price of two times P/BV (price to book value) for Wing Hang is not particularly attractive, especially compared with Singapore banks' 1.1 to 1.3 times FY2014 P/BVs and projected ROEs (return on equity) of 11 to 12 per cent.

"However, if compared with the recent Chong Hing Bank transaction, where Yue Xiu Group had offered to pay 2.1 times P/BV, a two times P/BV for Wing Hang would appear more palatable since: i) size-wise, Wing Hang is about 2.5 times larger than Chong Hing in terms of total assets; and ii) in terms of profitability, Chong Hing's annualised H1 2013 ROE and ROA (return on assets) stood at 7.5 per cent and 0.7 per cent, respectively, while Wing Hang's are at 10 per cent and 1 per cent (respectively)," DMG added.

Yue Xiu agreed last November to buy a majority stake in Chong Hing for US$1.5 billion, the first acquisition of a Hong Kong lender since 2009.

DMG added: "We think concerns over the potential dilution from the Wing Hang acquisition could also keep valuations below averages in the near term. In the longer term, the acquisition may put OCBC on stronger footing to tap the Greater China region for growth, though execution would be key."

DMG maintained its "neutral" call and future value of $10.90 for OCBC.

The deal, if it goes through, would mark a number of firsts for the Singapore bank.

It would be the first major acquisition by OCBC since Samuel Tsien took over as CEO. The bank has been expanding in Malaysia, Indonesia and Greater China, and Mr Tsien had hinted at a results briefing in November last year that it was eyeing a possible acquisition in Hong Kong.

OCBC currently has one branch in Hong Kong, while its Bank of Singapore unit has a broking centre there. Wing Hang Bank has a network of more than 70 branches spanning Hong Kong, Macau and mainland China.

The deal would also be a triumph for OCBC where others - such as United Overseas Bank and Agricultural Bank of China, which have wooed Wing Hang - have failed before.

Hong Kong's family-run banks, pressured by big players such as HSBC Holdings and Bank of China, are attracting interest from buyers. Wing Hang is a mainstream retail bank, whose clients are largely small and medium-sized enterprises. Its attributes are, however, not only domestic.

DMG pointed out that Wing Hang is "a gateway to China, (and will) potentially improve OCBC's position to participate in the offshore yuan market and wealth management".

"We estimate that the acquisition will double the size of OCBC's Greater China loan book to about $40 billion - or 22 per cent of the enlarged entity's gross loans - while pre-tax profit contribution from Greater China could rise to about 15 per cent, from 5 per cent," it added.

CIMB said: "The rationale is really to participate in growing Asian trade, especially as the (yuan) increasingly becomes the currency of trade.

"Having just a Singapore, Asean platform might not allow it to partake fully, especially if Singapore doesn't develop fully into a (yuan) hub. Hong Kong is a more natural (renminbi) hub."