Bid submitted said to be lower than 2x P/BV ask price. According to Bloomberg, OCBC has submitted a binding bid for Hong Kong’s family-run Wing Hang Bank (WHB). The bid is believed to have priced WHB at less than 2x P/BV, which is lower than the asking price. The relevant parties are currently in talks to bridge the valuation gap. WHB has 43 branches in Hong Kong, 12 in Macau and 14 in China. Operations outside Hong Kong contribute about 32% of its loan book. If the bid is successful, WHB would double OCBC China’s loan book. During its 3Q13 analyst briefing in Nov 2013, OCBC management said exposure to Hong Kong’s consumer space is not a necessity as it already has a corporate presence in the territory and private wealth management business through Bank of Singapore. Its ultimate focus is to broaden its presence in China.

Impact on capital ratios. At 1.8-2.0x P/BV, the acquisition will reduce OCBC’s Common Equity Tier 1 (CET1) ratio by 3.4-3.8ppts, assuming it is fully funded by internal cash. This will take the transitional Basel 3 CET1 ratio to 10.5-10.9% from the current 14.3%.

Impact on EPS. To make this exercise manageable, we assume two things – the transitional Basel 3 CET1 ratio is kept at 13% and new OCBC shares are issued at SGD8.50 apiece, a 15% discount to the current market price. Based on our back-of-the-envelope calculations, the acquisition would dilute EPS by 1-3% at 1.8-2.0x P/BV. This is before taking into account any potential cost and revenue synergies.

Reiterate HOLD. In our view, OCBC’s bid for WHB may deter investor interest in the stock for now, given the risk of overpaying. But a successful bid at a reasonable price may not immediately remove stock overhang as concerns over execution capabilities will linger. We value OCBC at SGD11.30, based on 14x 2014E core EPS, consistent with its rolling P/E average since 2005. At our TP, the implied FY14E P/BV is 1.5x, equivalent to its rolling P/BV average since 2005.

Source: Maybank Kim Eng Research - 6 Jan 2014