The Oversea-Chinese Banking Corporation is paying a hefty price to expand in China. The Singaporean company is realizing a long-held ambition by acquiring the Wing Hang Bank of China. But the deal, at almost $5 billion, looks expensive at a time when growth on the mainland is slowing and the Federal Reserve’s tapering is threatening to push up deposit costs.
It is no surprise that Wing Hang has chosen to sell after 77 years of family control. Despite a multiyear boom spurred 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, O.C.B.C.’s offer of 125 Hong Kong dollars (about $16) a share values the second-tier bank at more than two times its December book value. O.C.B.C., which has a slightly higher return on equity, trades at just 1.3 times its net worth.
Moreover, there is little immediate scope to bolster performance. O.C.B.C.’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 its branch network, the emphasis is on expansion rather than cost reduction.
O.C.B.C. 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 capitalize on the renminbi’s growing international popularity. About 17 percent of Wing Hang’s deposits are currently in the Chinese currency.
Nevertheless, the purchase brings risks to O.C.B.C. 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 O.C.B.C.’s long-term ambition in China.
Peter Thal Larsen is Asia Editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
