Oversea-Chinese Banking Corp has raised S$3.37 billion ($2.7 billion) from a fully underwritten rights issue to help fund its acquisition of Hong Kong’s Wing Hang Bank.
According to a term sheet seen by FinanceAsia, 440 million shares are being sold at a ratio of one share for every eight held at S$7.65 per unit — a 25% discount to the August 15 closing price of S$9.92 per share.
OCBC's founders, the Lee family, have already agreed to buy 26.7% of the shares through the Lee Group Companies, a banker close to the deal told FinanceAsia. The joint underwriters — Bank of America Merrill Lynch, HSBC and JP Morgan — have taken up the remaining 323 million units, which will be offered to shareholders on Sept 1-15.
“It’s split evenly three ways. The number looks big, but you have to look at the relative value to the bank’s market cap, which is $35 billion,” the banker said. “Plus, the stock is very liquid,” he added.
“We’re very comfortable with the risk,” a second banking source said. “[It sold at] a wide discount for a low volatility stock.”
Shares in OCBC fell nearly 1% on Monday following the rights issue announcement.
Strengthening the balance sheet
OCBC funded nearly half of its $4.99 billion acquisition of Wing Hang Bank — one of the few remaining family-run lenders left in Hong Kong — with cash.
So the rights issue, a third source said, was to “strengthen the balance sheet and enhance financial flexibility.” Still, some analysts had expected a much higher capital issue to pay for the Wing Hang acquisition and also noted that a 25% discount was one of the highest ever for an Asian bank.
“There were obviously different expectations from different analysts, ranging from S$2 billion to over S$4 billion,” the first banker told FinanceAsia. Despite the high discount, he argued that OCBC has more attractive ratios than its rivals DBS and United Overseas Bank.
DBS’s capital adequacy ratio (CAR), a measure of the bank’s financial strength under international Basel III requirements, stood at 16.3% as of 2013. UOB’s CAR is 17.2%.
By comparison, OCBC’s CAR is at 14.7% as of June 2014, and at 11% taking the Wing Hang purchase into account, according to the third banker. A lower CAR means less debt on its balance sheet.
Bankers also noted the delicate balance between issuing the right amount of equity for the balance sheet while simultaneously ensuring against any dilution of shares. “The less you issue, the less diluted [the shares],” the third source said.
Wing Hang acquisition
OCBC’s Wing Hang acquisition, which closed on July 29, will give the Singaporean bank further access to China, allowing it to benefit from the mainland's rising demand for lending services and to expand its renminbi trading services.
“To continue to grow the business we need to have access to [renminbi] and the [Wing Hang] acquisition will give us a platform to go in and source renminbi,” OCBC CEO Samuel Tsien said at a press conference in Singapore [pictured left].
OCBC's private banking arm will also gain access to Wing Hang’s clients, many of which are small- to medium-sized Chinese companies.
Hong Kong’s smaller banks have been ripe for consolidation as they grapple with increased competition from Chinese banks expanding across the border and with higher costs as a result of having to comply with new rules, most of which are globally driven, such as Basel III.
OCBC’s bid followed Yue Xie’s October acquisition of Chong Hing Bank, Hong Kong’s smallest family-run lender, at 2.1 times 2013 book value.
Wing Hang was being sold at 1.77 times book value as of December 13, although this includes dividends already slated for distribution. Stripped out, the bank’s book value per share falls to HK$68.97 to HK$70.59.
