* OCBC in exclusive talks to buy HK's Wing Hang Bank until Jan 31
* Deal would be nearly twice book value, worth $5.3 bln -sources
* 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 (Reuters) - 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 future."
"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 $4.6 billion.
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 attractive.
"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 S$11.30.
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 HK$115.60.
Analysts also note that OCBC is buying a bank that generates inferior returns and whose balance sheet is less fortified than its own.
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.
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 fixed-income market.
Founded in 1933, OCBC's last big acquisition was the $1.5 billion purchase of ING Group's Asian private bank in 2009.
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 in 2008.
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)