* OCBC in exclusive talks to buy HK's Wing Hang Bank until
* Deal would be nearly twice book value, worth $5.3 bln
* Deal would likely be dilutive for shareholders -UBS
(Adds OCBC confirmation that it is in exclusive talks)
By Saeed Azhar and Anshuman Daga
SINGAPORE, Jan 6 Singapore's Oversea-Chinese
Banking Corp is in exclusive talks to buy Hong Kong's
Wing Hang Bank Ltd, a deal that has raised concerns
about its estimated $5.3 billion price tag and the likely need
to tap shareholders for funds.
The acquisition would be OCBC's biggest and would give it a
much sought after gateway to China. The purchase would also help
it bridge the gap with domestic rival DBS Group Holdings
, which operates Hong Kong's fifth-biggest bank.
But Chief Executive Samuel Tsien, a former Bank of America
banker who took the helm in April 2012, must convince investors
that the potential rewards justify the price tag.
OCBC said on Monday it has entered into "an exclusivity
agreement" with the substantial shareholders of Wing Hang,
members of the Fung family and their affiliates and related
family trusts, and BNY International Financing Corp.
Both sides have until Jan. 31 to finalise the terms for a
possible transaction which would, should it proceed, involve
OCBC making a general offer for all of the shares of Wing Hang,
the two sides said in separate statements.
Two people familiar with the deal told Reuters on Friday
that Singapore's second-biggest bank was offering nearly twice
the Hong Kong lender's book value, worth about $5.3 billion.
OCBC or Wing Hang declined to comment on the price tag.
Kevin Kwek, a banking analyst at Sanford C. Bernstein & Co,
was one of several analysts who said that nearly two times price
to book was overpaying.
"For OCBC if the price is not significantly above current
traded price to book, the downside is not too significant apart
from management distraction, given the hoped-for benefits of
entrenching a China business and renminbi business in the
"But there is little justification to overpay: you may get
the China branches but you also have to figure out what to do
about the Hong Kong business longer term," Kwek said.
Wing Hang's current price to book of 1.7 times values it at
UBS analysts Stephen Andrews and Khairul Rifaie, estimating
a price tag of 1.75 times book value, say a deal would require
"sizeable capital raising" by OCBC and would likely be dilutive
for shareholders, adding that the returns might not be that
"Historically acquirers of banks in Hong Kong have struggled
to make a decent return on capital deployed," they wrote on
Monday as they cut OCBC's 12-month target price to S$10.90 from
DBS paid 3.34 times for Dao Heng in a $5.8 billion deal in
2001, forcing it taking big writedowns in 2005 and in 2010.
Shares of OCBC fell as much as 1.9 percent to S$9.83 in
early trading on Monday before a trading halt was imposed at the
bank's request. Trade in Wing Hang's shares was also suspended
at its request. They last changed hands down 1.4 percent at
Analysts also note that OCBC is buying a bank that generates
inferior returns and whose balance sheet is less fortified than
OCBC had 10.6 percent return on equity and core Tier 1
capital of 14.3 percent, compared to Wing Hang's 9.2 percent ROE
and 10.8 percent Tier 1 capital ratio.
ASIA'S SIXTH-BIGGEST LOAN MARKET
UBS, however, noted that a deal for Wing Hang would boost
OCBC's Greater China exposure to 25 percent of its loan book
versus 15 percent currently and to around 13-14 percent of its
profit after tax versus 5 percent now.
In addition to being a gateway to China and Asia's
sixth-biggest bank loan market, Hong Kong is also attractive to
foreign lenders keen to tap into the fast-growing offshore yuan
Founded in 1933, OCBC's last big acquisition was the $1.5
billion purchase of ING Group's Asian private bank in
Wing Hang Bank was founded as a money changing business in
1937 but has grown into a mainstream retail bank with more than
70 outlets in Hong Kong, Macau and China. It is one of four
remaining family-owned banks in Hong Kong.
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 percent stake.
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.
One banking source said that if the deal with OCBC were to
fall through, mainland China suitors could re-emerge.
In October, the trading arm of China's Guangzhou city
government agreed to buy three quarters of Chong Hing Bank for
about $1.5 billion, the first takeover of a Hong Kong bank since
the $4.7 billion deal for Wing Lung Bank by China Merchants Bank
Wing Hang Bank is being advised by Goldman Sachs Group
and Nomura Holdings, while Bank of America Corp
. is advising OCBC, sources told Reuters.
(Additional reporting by Denny Thomas; Editing by Edwina Gibbs)