Macquarie Equities Research (MER) issued a report on OCBC yesterday (1 April), after the local bank announced the terms of its proposed general offer for Wing Hang Bank. Here are some excerpts from the report.
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Impact

• OCBC has offered HK$125 per share, or HK$38,428m (S$6,234m) in total. That values Wing Hang at 1.77x 2013 P/BV, but as noted previously MER thinks this is closer to 3.0x P/BV for the underlying operations of the business (after stripping out cash and revalued property assets, for which OCBC is presumably not paying more than current fair value).
• MER has already seen one headline stating that the deal would be done with internal funds and external debt. MER thinks this is the wrong interpretation given that OCBC states it "plans to utilise a mix of internal resources and raising new debt and equity capital to maintain capital adequacy ratios at prudent levels post acquisition. These details will be announced at a later date."
• OCBC says it expects the deal to be EPS- and ROE-accretive in 2017. This is right in line with the typical IB presentation about "accretion in Year 3". The rationale for the deal, as expected, is given as gaining scope and scale in China with expectations of revenue synergies from cross-selling (which MER doesn't believe will be forthcoming) and a better RMB and USD funding base (which is correct).
• Further details are available on SGX's website in the company's seven-page press release [http://infopub.sgx.com/FileOpen/OCBC_Media_release_01042014.ashx?App=Announcement&FileID=289226] and full 48-page announcement
  [http://infopub.sgx.com/FileOpen/OCBC_Announcement_01042014.ashx?App=Announcement&FileID=289225].

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Action and recommendation
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• No change to MER’s Neutral call. OCBC has been MER’s least preferred stock among the three Singapore banks and today's announcement serves to underline that call.
• The acquisition is very unlikely to result in shareholder value accretion even in 2017, in MER’s view. MER also thinks that equity capital raising of around S$2bn is likely to be required to bring fully-implemented Basel 3 solvency ratios into line with its peers, as MER would not expect to see forbearance from the MAS.
• This brings up the spectre of a stock that historically has traded at a premium P/BV multiple to peers but which is delivering lower-than-peer ROE. Yes, the nominal price of 1.77x is far below what DBS paid for Dao Haeng, but this is still a value-destructive move in MER’s view.

Source: Macquarie Research - 2 Apr 2014