Why OCBC's aggressive China move could be a big, bad blow to its returns

Analysts are already doing facepalms.

OCBC could be getting ahead of itself with its aggressive expansion in China and pending stake in Wing Hang Bank as analysts' nightmares of unattractive returns are becoming real.

Among the Singapore banks, Barclays is very cautious on OCBC as its more aggressive expansion strategy into China with the pending acquisition of Wing Hang Bank (for 1.9x P/B FY13) is unlikely to generate attractive returns near-term.

Here's more from Barclays:

We expect the acquisition to be ROE-dilutive and be a drag on OCBC’s already lower-than-peer fully loaded Basel III core Tier 1 ratio of 11% (and ~8% assuming no capital raising).

Moreover, we see execution risk in integrating Wing Hang Bank into OCBC and transforming the business from a small local Hong Kong bank with a small presence in China into OCBC’s offshore/onshore RMB corporate banking platform. Wing Hang Bank currently has 15 branches/subbranches in China.

The revenue contribution from the China onshore business post acquisition will still be small, accounting for 3.7% of OCBC and Wing Hang Bank’s combined FY13 revenue (up from 2.3% pre-acquisition).