OCBC-Wing Hang takeover talks evoke memories of DBS's costly foray

OCBC's bid to take over Wing Hang Bank has stirred memories of DBS's purchase of another HK lender that resulted in huge write-downs

PUBLISHED : Thursday, 09 January, 2014, 1:27am
UPDATED : Thursday, 09 January, 2014, 5:07am

Oversea-Chinese Banking Corp's talks to buy Wing Hang Bank are reminding investors of the decade of write-downs DBS Group went through to integrate its purchase of a Hong Kong-based lender.

OCBC, Southeast Asia's second-biggest lender, said on Monday it was in exclusive talks that could last until the end of this month with Wing Hang's biggest shareholders to buy the bank, which has a market value of HK$36 billion.

OCBC shares fell to a more than six-month low in Singapore on Tuesday amid concern it may pay too much for the acquisition.

While the negotiations may lead nowhere, they stirred memories of DBS's US$5.4 billion purchase of Dao Heng Bank in 2001, which has cost the Singaporean lender at least S$2.1 billion (HK$12.8 billion) in write-downs.

[The acquisition of Wing Hang Bank] shouldn’t be looked at from a short-term perspective

DBS's management at the time was more experienced running investment banks than commercial banks, according to Macquarie Group's Matthew Smith.

OCBC's prospects might be better, he said.

"I don't think they really went and tried in the first decade or so after the acquisition to try to manage it as a proper commercial bank" with DBS, Smith said. "DBS in 2001 was run by investment bankers, which is not the case with OCBC today. These guys are proper commercial bankers."

OCBC chief executive Samuel Tsien, who has headed the bank since April 2012, ran the lender's global corporate bank from 2007. Before that, he spent 30 years with Bank of America and associated companies.

Darren Tan, who joined OCBC as head of asset and liability management in its global treasury division in 2007, is now its chief financial officer.

DBS was a domestic commercial bank until the end of the 1990s, run mostly by people seconded from the government, chief executive Piyush Gupta said in November 2011. The lender then focused on hiring chief executives with deal-making experience or investment-banking backgrounds, he said.

Jackson Tai was the lender's president and chief operating officer during the Dao Heng takeover and was chief executive from 2002 to 2007. He had a 25-year career in investment banking with what was then known as JP Morgan before joining DBS in 1999. Tai's successor, the late Richard Stanley, was Citigroup's China head and had worked in the US lender's global corporate investment bank in Singapore.

Before Gupta took over in November 2009, DBS's managers did not know whether a branch or a customer was profitable, and they lacked uniform practices, he said. Part of his efforts in the first years of his tenure to boost profitability included standardising management practices.

Under the stewardship of Gupta, a commercial banker with 27 years' experience with Citigroup, DBS has had 13 consecutive quarters of profit growth. Profit at the lender's Hong Kong unit rose 15 per cent year on year in the first three quarters of last year.

"I don't think it would be fair to make the comparison that since DBS and Dao Heng was so disastrously bad, this one is also going to be as bad," Smith said of OCBC's possible takeover of Wing Hang.

OCBC, which gets about two-thirds of its revenue in Singapore, is stepping up overseas expansion plans as it seeks to offset the lowest lending margins in Southeast Asia. The bank has 16 branches in mainland China, one in Taiwan and one in Hong Kong.

The lender's shares fell 1.2 per cent to S$9.75 in Singapore on Tuesday, the lowest close since June 24, amid mounting concern it would overpay for Wing Hang. The stock yesterday rose 0.1 per cent to S$9.76.

A purchase of the Hong Kong lender would be OCBC's biggest, surpassing the US$2.8 billion it paid in 2001 for Keppel Capital.

OCBC had offered less than the two times book value Wing Hang was seeking, sources said. The lender is valued at 1.8 times book. DBS bought Dao Heng at 3.3 times book.

Wing Hang has 70 branches in Hong Kong, Macau and the mainland. The bank's presence across the Pearl River Delta made it a more attractive target than other smaller family-owned banks in the city, Grace Wu, an analyst at Daiwa Capital Markets said last year.

"Greater China presents excellent prospects for OCBC as China increasingly becomes the driver of economic growth in the region," Tan said.

Buying Wing Hang would give OCBC a good "toehold" to expand into mainland China and allow it to expand its trade-financing capabilities, Aberdeen Asset Management Asia's Christopher Wong said. His company is OCBC's second-biggest shareholder with a 7.7 per cent stake.

The acquisition "shouldn't be looked at from a short-term perspective, but how they can develop the business over time", Wong said. "We are long-term investors, so we will evaluate it from a longer-term perspective."