OCBC Bank

Kim Eng on 10 Feb 2014

Share overhang to persist
OCBC’s share price has declined 8.6% since 3 Jan 2014 when the news about its bid for Hong Kong’s Wing Hang Bank (WHB) broke. The slide has been steeper than that for DBS (-4.4%) and UOB (-6.3%). Valuation looks cheap at 1.2x FY14E P/BV, equivalent to 1SD below the historical mean since 2005. However, we believe share price weakness is likely to persist, with downside bias, amid uncertainty over the WHB deal pricing and funding structure. We expect investors will continue to grapple with how synergies can be extracted from this acquisition.

What’s Our View
We believe OCBC may need to finance its acquisition of WHB with more than 50% equity. Without substantial equity fund-raising, its CET1 ratio of 14.3% will be significantly lower than that of UOB
(12.9%) and DBS (13.3%), putting it at risk of being downgraded by the credit rating agencies.

To reduce forecast risk, we shift our valuation methodology to P/BV from P/E. Ascribing a 1.24x P/BV multiple – equivalent to 1SD below its historical average – to our projected BVPS for FY14, we arrive at a revised TP of SGD9.16. This represents an 18.9% reduction from our earlier SGD11.30 TP (14x FY14E EPS or an implied 1.5x FY14E P/BV). Maintain HOLD as we believe the acquisition risks have largely been priced in. Key risk to our view: OCBC walks away from the purchase.

DBS our preferred pick. For exposure, we still prefer DBS as it is best positioned to benefit from rising interest rates given its strongest deposit franchise (highest proportion of cheap funding) and most liquid SGD balance sheet (73% as at end-Sep 2013).