OCBC Bank

Kim Eng on 11 Mar 2014

• OCBC is believed to be paying HKD115 per WHB share after a substantial HKD22.21 cash payout by the latter.
• On an all-in basis, WHB is priced at 1.94x FY13 P/BV, at the upper end of the widely reported range of 1.7-2.0x.
• Purchase of WHB remains a concern. Retain HOLD with TP of SGD9.08, based on 1.24x FY14E P/BV.

Paying 2.4x FY13 P/BV (ex-cash) for Wing Hang Bank?
According to sources, OCBC will pay HKD115 per WHB share after the latter has returned HKD20.59 cash and HKD1.62 final DPS to its shareholders. On an ex-cash basis, OCBC is effectively paying out HKD35.4b (SGD5.8b) or 2.4x FY13 P/BV. The all-in purchase consideration of HKD137.21 (HKD115 + HKD20.59 cash + HKD1.62 final DPS) per WHB share implies a 1.94x FY13 P/BV. The cash payout is to entice the minority shareholders of WHB to accept the deal. It also ensures the Fung family does not lose “face” given the likely media headline of 2.4x P/BV (ex-cash), higher than the recently transacted price of 2.1x P/BV for the smaller and less established Chong Hing Bank.

Credit rating at risk without a large fund-raising
Pricing is at the upper end of the oft-cited P/BV range of 1.7-2.0x. In our view, OCBC may need to finance its acquisition with more than 50% equity. The reason: Its transitional Basel III Common Equity Tier 1 (CET1) ratio of 14.5% is just slightly higher than that of DBS (13.7%) and UOB (13.2%). Without substantial equity fund-raising, its CET1 ratio will be significantly lower than that of UOB and DBS. A 100% internally cash-funded purchase would cause OCBC’s CETI to slide by 3.7ppts to 10.8%, putting it at risk of being downgraded by the credit rating agencies. Reiterate HOLD; WHB purchase an overhang We reiterate our HOLD call on OCBC with a TP of SGD9.08, based on 1.24x FY14E P/BV. In our view, the probability of the deal being consummated is high as both parties are highly motivated.