OCBC displayed a stellar performance yesterday, surging 1.5% even when the STI ended the day 0.1% lower. This came after OCBC announced that it currently owns 97.5% of Wing Hang Bank (WHB), allowing the latter to delist.
 
Macquarie Equities Research (MER) released a research paper on 29 Jul, which is the bank’s Offer Closing Date to tender WHB. MER has an ‘Underperform’ rating on the stock, with a 12-month price target of $8.20, some excerpts from the research report are shown below.

Event
The Offer Closing Date to tender Wing Hang Bank (WHB) shares for HK$ 125.00 ended on 29 July 2014. OCBC and its Concert Parties obtained 97.5% of the issued share capital of WHB at close of the tender offer.
OCBC will compulsorily acquire all remaining share of WHB. After completion, WHB will become a wholly owned subsidiary of OCBC.
 
Impact
 
Significant pro-forma capital shortfall to turn into a real capital shortfall. Because of the WHB deal, MER believes that OCBC could require S$7.3bn of pro-forma capital shortfall (>20% of current market cap) to lift its Core Equity Tier 1 (CET1) ratio to 12% (Basel 3 fully loaded). OCBC may have to massively dilute its shareholders (potentially multiple times) or it could reduce its 87% stake in Great Eastern Holdings (GEH).
 
Mid-term reduction in stake of Great Eastern Holding is an option, in MER’s view. 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. MER’s analysis suggests that OCBC could avoid a capital increase and fund the WHB acquisition by reducing its stake in GEH.
 
Price catalyst
12-month price target: S$8.20 based on a Price to Book methodology.
Catalyst: Funding of WHB deal, potential capital increase (short term), potential reduction in the 87% GEH stake (mid-term).
 
MER’s action and recommendation
At the moment, MER has an Underperform recommendation on OCBC and a target price of S$8.20. MER’s current cautious view on OCBC is almost exclusively based on the 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.
 
A potential reduction in OCBC’s 87% stake in Great Eastern Holdings (GEH) could fundamentally change MER’s investment case for OCBC and MER will remain watchful on this topic.

Source: Macquarie Research - 31 Jul 2014