Wednesday, 20 August 2014


Kim Eng on 19 Aug 2014

  • On paper, Greater China strategic initiatives look good, with revenue synergies from day one.
  • Execution is critical. May prove harder than expected. Scrip dividends likely to stay, lifting CET1 higher.
  • Maintain HOLD and TP of SGD10.10 (1.24x FY15E P/BV). Top sector pick is DBS.
Upbeat management but execution is key
Management painted sanguine prospects in yesterday’s briefing on the bank’s rights issue to finance its acquisition of Wing Hang Bank (WHB). There are revenue synergies by leveraging WHB’s presence in the Pearl River Delta and cross-selling each other’s specialised products. A larger platform in Greater China should help OCBC capture trade and investment flows in the region, capitalise on rising affluence in Greater China and build a stronger deposit base in USD and CNY.
4% EPS and 0.4ppt ROE dilution

We estimate the rights (SGD3.3b at SGD7.65 apiece) will dilute our FY15E/16E EPS by up to 4%, translating into ROE dilution of 0.4ppt for both years. The rights issue would restore OCBC’s transitional common equity Tier 1 (CET1) to 13.2% vs DBS’s 13.5% and UOB’s 13.9%. Its scrip dividend scheme will remain a key feature for raising CET1 higher. We have yet to factor in WHB’s financials. On a pro-forma basis, our TP is unlikely to change much.

Not taking a leap of faith; maintain HOLD
We maintain our HOLD rating on OCBC and TP of SGD10.10, based on 1.24x FY15E P/BV. This is 1SD below its average P/BV since 2005 to factor in M&A risks. As with most M&As, execution could prove trickier than initially expected. In our view, any concrete results are only likely to emerge in 2H15E, at the earliest. Management expects the acquisition to turn accretive three years from now.

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