Doubts over OCBC's $6 billion China gamble

Doubts over OCBC's $6 billion China gamble
OCBC could settle for a mix of half debt and half equity to fund the $6.23 billion deal to take over Hong Kong’s Wing Hang Bank.

If OCBC Bank is buying Wing Hang Bank merely to expand its footprint in Hong Kong's crowded banking market, the $6.23 billion it will have to splash out for the acquisition makes little sense.

After all, OCBC's shares trade at just 1.3 times net worth and it would be acquiring the Hong Kong lender at about twice its book value.

In other words, OCBC is paying a significant premium for Wing Hang when compared to the valuation assigned to OCBC by local share investors.

The acquisition also comes at a time when growth in the mainland economy is slowing down and the US central bank's tapering efforts may reverse the flow of cheap deposits into Hong Kong.

But many analysts are keen to point out that OCBC's reason for such a deal boils down to access to mainland China.

The purchase would double OCBC's branch network in China. There would be further scope to grow Wing Hang's deposit base in the Chinese currency as OCBC capitalises on its reputation as one of the world's strongest banks to entice more Chinese savers into its fold.

However, the icing on the cake for OCBC is the opportunity afforded by the Wing Hang deal to ride on trade finance growth in China, where its local rival DBS Bank has built up a substantial trade finance business.

This is crucial to OCBC, which may find growth on its home turf - the Singapore market - stymied by moves such as the Government's slew of measures to cool the residential market.

As Britain's Financial Times points out, trade finance is particularly popular in Asia, and business in this area has boomed for banks, especially in China. It also noted that OCBC's Greater China loan book grew more than 50 per cent last year, driven by a near doubling of its trade finance business.

On paper at least, Wing Hang's China branches make an attractive beachhead for OCBC to connect the bustling Pearl River delta in southern China with the Singapore lender's traditional heartland in South-east Asia.

So far, investors appear to have bought into the story. Since it resumed trading on Tuesday after a halt to announce the deal, its share price had risen 2.1 per cent to $9.71 yesterday.

But as Standard Chartered analyst Jaj Singh observed in a note, DBS' less-than-triumphant record in Hong Kong will temper investors' views of OCBC's China ambitions with caution.

In 2001, DBS bought Hong Kong's Dao Heng Bank for $10 billion, or three times book value. But it later had to make writedowns of at least $2.1 billion on its purchase.

Wrote Mr Singh: "OCBC speaks about its aspirations for China, but 77 per cent of Wing Hang's pre-tax profit is from Hong Kong. Is a Hong Kong presence necessary for the yuan business? Will the upcoming free-trade zones in Shanghai and Guangzhou dilute the importance of Hong Kong?"

Then there is the question of whether OCBC will have to ask its shareholders for money to fund the acquisition.

Credit Suisse, which keeps its underperform rating on OCBC, believes the lender may need a $2.5 billion to $3 billion rights issue to help fund the purchase.

"While the deal provides some strategic benefits to OCBC in Greater China, we remain sceptical of its financial benefits, given the premium being paid. Potential dilution risk from an equity raising is a near-term overhang," it added.

engyeow@sph.com.sg

This article was published on April 5 in The Straits Times.

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