- POSTED: 15 Jan 2014 23:19
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Faced with the thinnest lending margins in Southeast Asia, Singapore banks are increasingly looking overseas for growth. But according to Credit Suisse, none of the banks' major overseas acquisitions have paid off so far.
SINGAPORE: Faced with the thinnest lending margins in Southeast Asia, Singapore banks are increasingly looking overseas for growth.
But according to Credit Suisse, none of the banks' major overseas acquisitions have paid off so far.
On a standalone basis, these investments have failed to hit close to their 11 to 12 per cent sustainable return on invested capital targets.
Singapore’s OCBC Bank is in talks to acquire Hong Kong’s Wing Hang Bank.
OCBC - Southeast Asia's second largest lender by assets - is also reportedly in talks to fund the acquisition by selling bonds to HSBC and Bank of America.
Alan Lok, director at Sabio Global, said: "If the financing is going to come from debt, then that might have an adverse impact on the credit rating - meaning that the gearing level might be stretched out. And based on the current market price of OCBC versus Wing Hang, it's not very possible for them to raise (funds) through a rights issue, because the price to book (ratio) of OCBC is actually much lower than that of Wing Hang. And in terms of price to earnings ratio, I don't think it is worthwhile."
The Wing Hang purchase will give OCBC more exposure to greater China, one of the bank's four core markets. The others are Singapore, Malaysia and Indonesia.
In a separate announcement on Tuesday, OCBC raised its stake in China's Bank of Ningbo to 20 per cent.
But Credit Suisse said it is unlikely that OCBC will be able to justify the valuation premium to be paid on Wing Hang.
Assuming a price of almost 1.9 times Wing Hang's book value, or S$6.4 billion, OCBC will need to double Wing Hang's return on equity (ROE) to around 21 percent.
Credit Suisse sees ROEs improving to 15 per cent at best.
Based on past transactions such as DBS' acquisition of Hong Kong's Dao Heng Bank, Singapore banks' overseas bets look unattractive.
But some analysts said the deals may need to be evaluated over a longer time horizon.
Ivan Tan, director of Financial Institutions Ratings at Standard & Poor’s, said: "Most of the acquisitions in the region have been done at between two and three times of price to book. So the higher the cost you pay, the longer the recovery period. That's the initial risk that they face. The second is the operational risk - the regulatory environment overseas may not be a level playing field for a Singapore bank."
It was regulatory restrictions that scuppered DBS' bid for Indonesia's Bank Danamon last year.
But the bid may get revived. Based on recent reports, the newly-established Indonesian Financial Services Authority said it might be willing to review the issues surrounding the aborted bid.
According to a report by Mizuho Securities, a compromise could be reached and the price could be 23 per cent lower in Singapore dollar terms, due to the significant depreciation of the Indonesian rupiah since April last year.