As of 3:25pm today, one of Singapore’s three banking mainstays, Oversea-Chinese Banking Corporation (SGX: O39), is halted from trading on the markets. Shares of the bank were down by 1.5% to S$9.83 when the trading halt went into effect at 10:30am. I’m certainly not privy to the inner-goings of OCBC but it seems likely that the halt might have something to do with the Singapore bank’s proposed acquisition of Hong Kong-based Wing Hang Bank, a sub-regional bank with 70 branches in Hong Kong, Macau, and China. According to a Reuters report on 3 Jan 2014 (last Friday),…
As of 3:25pm today, one of Singapore’s three banking mainstays, Oversea-Chinese Banking Corporation (SGX: O39), is halted from trading on the markets. Shares of the bank were down by 1.5% to S$9.83 when the trading halt went into effect at 10:30am.
I’m certainly not privy to the inner-goings of OCBC but it seems likely that the halt might have something to do with the Singapore bank’s proposed acquisition of Hong Kong-based Wing Hang Bank, a sub-regional bank with 70 branches in Hong Kong, Macau, and China.
According to a Reuters report on 3 Jan 2014 (last Friday), OCBC had “begun exclusive talks to buy Hong Kong’s Wing Hang Bank in a deal that would value the family-run lender at about [US]$5.3 billion [around S$6.7b, and almost twice Wing Hang Bank’s book value]”.
However, Bloomberg News then followed up with a report this morning that said that “OCBC conducted due diligence and bid less than the two times book value Wing Hang was seeking.” According to S&P Capital IQ’s data for Wing Hang’s latest financials, its book value comes in at HK$20.4b (around S$3.3b), which gives it a price-to-book value of 1.74 based on its current market capitalisation of HK$35.5b (around S$5.7b) at a price-per-share of HK$115.60.
OCBC has a well-defined strategy of growing its business, and one key element would be its quest to “deepen [its] business presence in Malaysia, Indonesia and Greater China.” As it stands, OCBC’s total revenue from China is tiny, accounting for only 5.4% of the bank’s overall revenue for the first nine months of 2013.
If the Wing Hang deal is eventually done, that would enable OCBC to have a more meaningful presence in China. Grace Wu, an analyst from Daiwa Capital Markets Hong Kong Ltd., told Bloomberg that “[Wing Hang’s] presence across southern China’s Pearl River Delta makes it a more attractive target than other smaller family-owned banks in the city.”
But, unless OCBC comes up with a definitive statement, investors can’t be certain of the acquisition-price, or even if the acquisition would even take place.
Nonetheless, it still pays for investors of OCBC to take a closer look at Wing Hang bank. After all, the sums of money being bandied around for the purchase is no chump change, especially given OCBC’s own market capitalisation of “just” S$34.4b.
One of America’s best banks in the past decade, Bank of the Ozarks, has a focus on three banking metrics: net interest margin, efficiency (the percentage of revenue that goes to non-interest costs), and asset quality (measured through the non-performing loans/total loans ratio).
Here’s how Wing Hang’s ratios stack up with those of OCBC as well as some of its competitors, such as Hang Seng Bank Limited, Chong Hing Bank Limited, Dah Sing Financial Holdings and BOC Hong Kong Holdings Limited.
|Net Interest Margin||2012||2011||2010||2009||2008|
|Wing Hang Bank||1.6%||1.7%||1.8%||1.8%||1.8%|
|Hang Seng Bank||1.9%||1.8%||1.8%||1.9%||2.4%|
|Chong Hing Bank||1.1%||1.2%||1.2%||1.2%||–|
|BOC Hong Kong||1.6%||1.3%||1.5%||1.7%||2.0%|
Source: S&P Capital IQ; Wing Hang Bank’s annual report
|Wing Hang Bank||47.6%||45.8%||48.8%||55.1%||41.2%|
|Hang Seng Bank||34.4%||35.0%||33.7%||32.6%||29.2%|
|Chong Hing Bank||59.6%||58.8%||56.9%||74.7%||–|
|BOC Hong Kong||32.3%||25.5%||34.8%||34.0%||34.4%|
|*With the Efficiency ratio, the lower the better|
Source: S&P Capital IQ
|NPL/Total Loan Ratio||2012||2011||2010||2009||2008|
|Wing Hang Bank||0.4%||0.3%||0.3%||0.5%||0.7%|
|Hang Seng Bank||0.2%||0.3%||0.4%||0.7%||1.0%|
|Chong Hing Bank||0.1%||0.2%||0.1%||0.2%||0.3%|
|BOC Hong Kong||0.2%||0.1%||0.1%||0.3%||0.4%|
|*With the NPL/Total Loan ratio, the lower the better|
Source: S&P Capital IQ
Looking at the tables above, we can see that Wing Hang has been one of the better banks among its competitors in terms of its net interest margin, efficiency, and asset quality. In particular, though it has lower efficiency, it does bring better asset quality to the table for OCBC.
From the vantage point of ‘quality’ then, it would seem that Wing Hang bank’s demand for a premium of two times its book value does have some merits.
But at the same time, investors should also note that the amount of value an acquisition can add to a company hinges largely on the price paid by the acquirer in relation to the underlying business value of the target; at a reported price of two times book value or thereabouts, the acquisition of Wing Hang Bank would certainly need to clear a tall hurdle to justify such a high valuation.
Foolish Bottom Line
The three local banks, OCBC, DBS Group Holdings (SGX: D05), and United Overseas Bank (SGX: U11), collectively hold a huge influence over Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).
As a result, investors in the index through index-trackers such as the SPDR Straits Times Index ETF (SGX: ES3) or Nikko AM Singapore STI ETF (SGX: G3B) might be interested in important developments in the local banks.
Currently, China makes up small portions of DBS and UOB’s business, accounting for roughly 8% each in the two banks’ overall revenues for the first nine months of 2013.
OCBC’s poised to be the first to make a big splash in China (according to reports from Bloomberg and Reuters I referenced earlier) and investors would likely be hoping the move, if it materialises, can be further fuel for the bank’s growth, which has been stellar given how net income has grown by 307% since 2002 to S$2.72b in the last 12 months
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