Event
A reduction of OCBC’s 87% stake in Great Eastern Holding (GEH) would be an easy way for OCBC to unlock shareholder value and could trigger a re-rating for both stocks in MER’s view.
 
MER’s analysis suggests that OCBC could avoid a capital increase and fund the pending Wing Hang Bank (WHB) acquisition by reducing its stake in GEH. At the same time its underlying profitability profile would improve, earnings visibility would be higher and it would not impair the cross-selling story for OCBC in MER’s view.
 
Impact
Many sound reasons for OCBC to reduce the 87% stake in GEH – A 100% acquisition of WHB could result in a pro-forma S$ 7.3bn capital shortfall (>20% of current market cap) for OCBC to achieve 12% common equity tier I (CET1) on a fully loaded Basel 3 basis MER believes. Further, GEH will consume S$ 4bn of regulatory capital for OCBC and underlying profitability on GEH will fall to single digit levels from mid-teen levels in the new regulatory environment based on MER’s estimates.
 
A 48% reduction of OCBC’s stake in GEH to 39% would significantly reduce the regulatory capital deductions for GEH to S$ 1bn and lift the pro-forma CET1 ratio (B3 2014E) for OCBC+WHB to 10.7% based on MER’s estimates.
 
Price catalyst
12-month price target: S$8.20 based on a Price to Book methodology.
 
Catalyst: potential reduction in OCBC’s 87% stake in GEH; pending WHB deal; merger integration expenses and execution risks
 
MER’s action and recommendation
At the moment MER has an Underperform recommendation on OCBC and a Target Price of S$ 8.20. A potential reduction in OCBC’s 87% stake in GEH could fundamentally change MER’s investment case and MER will remain watchful on this topic.
 
MER’s current cautious view on OCBC is almost exclusively based on the pending WHB acquisition and the capital uncertainties as a result of it. Negative market earnings revisions due to integration and restructuring expenses, a deteriorating profitability and risk profile as well as challenges to repair capital ratios could lead to a structural de-rating of OCBC shares in MER’s view.

Source: Macquarie Research - 19 Jun 2014