In China and Myanmar, bank sees a match made in heaven

TOMOMI KIKUCHI, Nikkei staff writer

Singapore-based OCBC's acquisition of Wing Hang Bank widened its branch network in mainland China, Hong Kong, Macau and Taiwan from 25 to 120.

SINGAPORE -- As its name suggests, Oversea-Chinese Banking Corp. has leveraged the wealth and business activities of the Chinese diaspora. This has been the Singaporean institution's raison d'etre since the founding of its predecessor, Oversea-Chinese Bank, in 1919.

     True to form, OCBC now aims to cater to Chinese companies that are expanding into Myanmar.

     In 2014, the Singaporean bank made headlines with a couple of major moves: its entrance into Myanmar's banking sector and its acquisition of Hong Kong's Wing Hang Bank. In October, OCBC secured a banking license in Myanmar alongside eight other foreign institutions. Linus Goh, head of global commercial banking at OCBC, told the Nikkei Asian Review that the bank is eyeing an increased flow of foreign direct investment into the Southeast Asian country. "We see heightened interest in infrastructure development, such as energy, telecommunications and oil and gas, as well as hospitality industries," Goh said.

     OCBC hopes to capitalize on that flurry of activity while working with Myanmar's own banks to develop their capabilities.

     This is a moment OCBC had been waiting for. The bank's history in Myanmar goes back to 1923, when its predecessor set up the first branch in Rangoon, present-day Yangon. After the Burma Road opened in 1939, connecting Myanmar and China, the bank established a new branch near the Chinese border, financing trade until 1963. After a three-decade absence due to the 1962 coup, the bank re-entered the country with a representative office in 1994.

     OCBC's new operation in Myanmar effectively has a built-in network of Chinese clients, thanks to the Wing Hang acquisition. The deal increased OCBC's branches in China, Hong Kong, Macau and Taiwan from 25 to 120. "Myanmar, because of its rich resources, will be an attractive location" for Chinese companies, including state-owned ones based in southern China, to make cross-border investments, said Samuel Tsien, OCBC's chief executive officer.

Was it worth it?

Wing Hang did not come cheap -- it cost $5 billion. "Wing Hang's owner, the Fung family, wasn't willing to let go of shares for a low price," said Kenneth Ng, head of research at the Singaporean arm of Malaysia's CIMB Research. "In the end, OCBC was the only one negotiating, reaching closest to the family's requested price."

     Investors will be focusing on OCBC's efforts to bring about synergies with its new unit.

     OCBC uses its strong existing network to handle cross-border trade and offshore financing between China and Southeast Asia. The bank also has an edge in wealth management, with around $51 billion in assets under its watch and a list of high-net-worth clients in Southeast Asia, China, India and other markets.

     Wing Hang, meanwhile, serves many owners of small to midsize enterprises. OCBC hopes to tap into this client base while utilizing its private banking managers and products to enhance Wing Hang's offerings.

     Ng said he sees the deal as a positive and rates OCBC's stock as an "add." "The market has reacted to the expensive purchase of Wing Hang, and OCBC is now trading at a low valuation," he said. "The synergies will not come immediately, but we expect profitability to improve in the long run."

     Another point of concern is China's slowing economic growth. OCBC last year placed fourth in a ranking of the world's strongest banks by Bloomberg, thanks to its low ratio of nonperforming loans to assets and high Tier 1 capital ratio. But some worry that Singaporean financial institutions will have a hard time this year due to a number of factors: a higher volume of bad loans due to China's weaker economic momentum, a downtrend in the city-state's property market, and neighboring Malaysia's struggles with falling crude oil prices and the related loan-default risks.

     Among the three biggest Singaporean banks, OCBC's main rival is probably DBS Bank, which has around 120 branches in China, Hong Kong and Taiwan. DBS Bank's total lending in the region came to a little less than 100 billion Singapore dollars ($75.3 billion) in the quarter ending in September 2014, while OCBC's corresponding figure was about half, at S$52 billion. OCBC does, however, have a stronger presence in surrounding Southeast Asian countries, such as Indonesia, Malaysia and, now, Myanmar.

     As cross-border business activity picks up in the region, the market will be monitoring how OCBC links its Southeast Asian platforms with its Chinese network.