OCBC Bank's Greater China strategic initiatives looking "good on paper"
But execution is critical.
The management of OCBC Bank painted sanguine prospects in its recent briefing on the bank’s rights issue to finance its acquisition of Wing Hang Bank (WHB).
According to a research note from Maybank Kim Eng, 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.
Here’s more from Maybank Kim Eng:
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.
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.
Hard part about to begin. On paper, potential revenue synergies look good.
Like any M&A, the critical part is management's ability to execute its plan.
In our view, the market is likely to stay unconvinced until concrete results emerge.
In our view, these are only likely in 2H15E, at the earliest.
Management expects the acquisition to turn EPS- and ROE-accretive only three years from now.
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