SINGAPORE (Reuters) - Singapore OCBC's bid to take over Hong Kong's Wing Hang Bank Ltd 0302.HK in a deal estimated at $5.3 billion has raised concerns it may be paying too much for a mid-sized bank and will be tapping shareholders to fund the acquisition.
Oversea-Chinese Banking Corp (OCBC.SI), Singapore's second-biggest bank, has begun exclusive talks with Wing Hang, offering nearly twice the Hong Kong lender's book value, two people familiar with the deal told Reuters on Friday.
Shares of OCBC fell as much as 1.9 percent in early trading on Monday before a trading halt was imposed at the bank's request. Trade in Wing Hang's shares were also suspended at its request. They last changed hands down 1.4 percent.
While an acquisition of Wing Hang would give OCBC a gateway into mainland China and help bridge the gap with DBS Group Holdings (DBSM.SI), which operates Hong Kong's fifth-biggest bank Dao Heng, UBS analysts say the deal would require "sizeable capital raising" by OCBC and would likely be dilutive for shareholders.
Generating good returns will also not be easy.
"Historically acquirers of banks in Hong Kong have struggled to make a decent return on capital deployed," UBS analysts Stephen Andrews and Khairul Rifaie wrote on Monday as they cut OCBC's 12-month target price to S$10.90 from S$11.30.
DBS (DBSM.SI) has also struggled with its expensive acquisition in 2001 when it paid 3.34 times for Dao Heng in a $5.8 billion deal. That deal forced DBS to take big writedowns in 2005 and in 2010 to reflect the market value of the bank's struggling Hong Kong business.
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.
Hong Kong is Asia's sixth-biggest bank loan market and is attractive to foreign lenders keen to tap into the fast-growing offshore yuan fixed-income market.
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 (BK.N) are the biggest shareholders with a combined 45 percent stake.
Reuters previouly reported that the sale process had attracted interest from suitors including Agricultural Bank of China (601288.SS), Australia and New Zealand Banking Group (ANZ.AX) and Singapore's United Overseas Bank (UOBH.SI).
But Wing Hang's high price expectations prompted many to drop out of the auction.
OCBC shares were the biggest losers in a broader market .FTSTI which was up 0.1 percent when its shares were halted.
"There are some concerns that OCBC might overpay for the acquisition. Whether or not OCBC wins the bid, markets seem to be first selling on the bid news," said a trader at a bank in Singapore.
Additional reporting by Denny Thomas; Editing by Edwina Gibbs