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Wing and a prayer

1 April 2014 By Peter Thal Larsen

Oversea-Chinese Banking Corp is paying a hefty price to expand in the People’s Republic. The Singaporean group is realising a long-held ambition by splashing out almost $5 billion for Hong Kong’s Wing Hang bank. But the deal looks expensive at a time when growth on the mainland is slowing and the U.S. Federal Reserve’s tapering is threatening to push up deposit costs.

It’s no surprise that Wing Hang has chosen to sell after 77 years of family control. Despite a multi-year boom fuelled by low interest rates in Hong Kong and growth in China, the bank’s return on equity last year was a pedestrian 10 percent. But the relative shortage of local takeover targets means its value has soared. After stripping out mark-to-market gains on Wing Hang’s property portfolio, and subtracting the recently announced full-year dividend, OCBC’s HK$125-a-share cash offer values the second-tier bank at more than two times its December book value. OCBC, which has a slightly higher ROE, trades at just 1.3 times its net worth.

Moreover, there’s little immediate scope to boost performance. OCBC’s presence in Hong Kong is limited, and anyway it has promised not to force job cuts for 18 months. In mainland China, where the purchase will double OCBC’s branch network, the emphasis is on expansion rather than cost reduction.

OCBC is keen to stress the growth potential from the deal. Wing Hang gives it greater opportunity to finance trade between China and other parts of Asia such as Malaysia and Indonesia, where it already has a foothold. Wing Hang’s strong funding base – loans were just 73 percent of deposits at the end of last year – is another advantage, as is its ability to capitalise on the yuan’s growing international popularity. About 17 percent of Wing Hang’s deposits are currently in the Chinese currency.

Nevertheless, the purchase brings risks to OCBC investors. China’s economic slowdown is creating credit wobbles, while Hong Kong’s property boom is bound to have led to some lending excesses. Meanwhile, rising interest rates in the United States could reverse the cheap deposits that have flowed into both Hong Kong and Singapore in recent years. Shareholders, who will probably be asked to help finance the purchase, may pay a high short-term price for OCBC’s long-term China ambition.

 

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