KUALA LUMPUR, June 5 — Analysts are divided whether the Wing Hang Bank acquisition will affect the stock price of Oversea-Chinese Banking Corporation Limited, as it proceeds with plans to enter Greater China and capture revenue there.
Since OCBC made its voluntary pre-conditional offer on April 1, 2014, it has started to raise money for the purchase, and has six months for the task after which the offer expires.
The offer requires (refer para 3.2) that both offerer (OCBC Pearl Limited, wholly-owned OCBC subsidiary) and OCBC be approved by the Hong Kong Monetary Authority, the Securities and Futures Commission of Hong Kong, the Insurance Authority of Hong Kong, the Mandatory Provident Fund Schemes Authority, the Monetary Authority of Macau, and the Monetary Authority of Singapore, any one of which could void the offer if it does not give its consent.
Also, any one of the following conditions described in para 3.3, could just as well disrupt OCBC’s plans.
This acquisition aims to acquire all of Wing Hang Bank Limited and cancel its outstanding options and unvested awards.
For the first quarter, OCBC CEO Samuel Tsien said the company is performing well and has a strong position to grow in North and Southeast Asia, especially with the Wing Hang Bank acquisition underway.
These are its earnings for Q1FY14:
Net Interest Income (NII): +19.2 per cent to S$1.09 billion
Net Interest Margin (NIM): +1.7 per cent vs +1.64 per cent
Profit: +18.8 per cent to S$1.89 billion
Cash flow from operations: (S$2.83 billion) vs (S$7.45 billion)
Dividend: Nil vs Nil
Net Interest Income (NII) grew to S$1.09 billion from S$912 million because of asset growth and improved net interest margins by 6 basis points.
Net Interest Margin (NIM) grew to 1.7 per cent from 1.64 per cent (or 6 basis points) because of higher loan spreads and increased income from money market activities and gapping opportunities.
Non-interest Income grew to S$800 million from S$676 million previously because of increases in fee and commission earnings spurred by growth in wealth management, loan-and trade-related income, and a one-off gain of S$32 million from the partial disposal of Great Eastern Holdings’ China JV stake.
Profit grew to S$1.89 billion from S$1.59 billion because of broad-based income growth, but partly offset by higher operating expenses.
Operating expenses grew 5 per cent because of higher staff costs arising from annual increments, more hires to support business growth in key markets, higher depreciation expenses for property and equipment, and higher costs from greater business volumes and insurance-related expenses.
Allowances for loans and other assets increased to S$41 million from S$21 million because allowances for loans (net of recoveries and write-backs) were S$23 million from S$2 million previously.
No changes were made to portfolio allowances for loans at S$17 million.
Tan Ngiap Joo replaced Ho Ai Lian as the group’s new Audit Committee chairman, in the re-election process at the annual general meeting on April 24, 2014.
Bullish analyst report
CIMB Equity Research upgrades its rating on OCBC on the basis of sustainability in forecast growth and a good first quarter.
The Wing Hang Bank acquisition is expected to dilute earnings by 2 per cent-7 per cent when new shares are issued to raise funds for this transaction.
This should be easy to shoulder on the basis that Net Interest Income (NII) will grow and sustain on the rise in loans.
The expansion of NIM by 6 basis points to 1.7 per cent in Q1, comprise improved spreads on corporate and consumer loans, and higher yields from the excess Chinese Yuan currency placed on the market.
Corporate loans continue to perform well across all geographies except for Malaysia, where there is margin pressure.
The non-performing loan (NPL) ratio for OCBC Malaysia deteriorated 50 basis points to 2.3 per cent in Q1 because of a customer in the steel business.
OCBC said it has taken more caution for its Malaysia operations as a result of this, but it remains optimistic on Indonesia.
NIM increased by 13 basis points to 4.13 per cent in Q1 for OCBC NISP, which it attributed to a focus on the mass commercial market and large corporate clients, lending it greater benefit from rates not immediately or fully responding to changes in reference market rates.
For business in China, OCBC clarified that its exposure to China trade financing was through importers of basic raw materials and commodities, which are unaffected by movements in the Yuan because bills and payments are Yuan-denominated.
Moreover, Greater China non-trade loans go to ASEAN expansion plans of large Chinese companies, not to their infrastructure or property in China.
CIMB Equity Research has an ADD call with a price target of S$11.01.
Bearish analyst report
Phillip Securities Research says the Wing Hang acquisition continues to be a share price overhang, looming over operations which are generally performing well.
It maintains its rating on the stock on the basis the company still has strong earnings channels in wealth management, trade financing, and bancassurance (banking insurance).
Phillip Securities Research has a NEUTRAL call with a price target of S$9.74.
Maybank Kim Eng Research is just as cautious over OCBC because of the Wing Hang acquisition in spite of a robust quarter.
It believes that while the valuation of Wing Hang appears cheap, share price weakness will persist.
Maybank Kim Eng Research reiterates a HOLD call with a price target of S$9.08.
Investor Central. We keep your investments honest.
1. How will the Wing Hang acquisition affect its stock price?
Analysts were concerned OCBC would pay too much for the acquisition.
But OCBC is ignoring analysts by going ahead with its Greater China business aspirations and the connections with other external customers.
This causes them to differ over the opinion that this acquisition will affect the stock price.
OCBC will pay HK$38.4 billion (S$6.23 billion) for the Hong Kong family-run bank owned by the Fung’s.
This includes 70 brick-and-mortar branches in the Pearl River Delta region and its Internet banking offerings for retail and corporate customers.
Chairman and CEO, Patrick Fung said in the outlook for 2014 that Hong Kong’s economy is expected to grow moderately with the support from low unemployment and a returning demand from the US and Europe.
China remains a key market for business as the growing internationalisation of the Chinese Yuan and interest rate differentials between Hong Kong and China will present more opportunities both domestic and foreign.
On the downside, there could be tighter credit control in China which could lead to lower deposits made in Hong Kong by Chinese customers.
The US Federal Reserve will also present challenges when it reduces its quantitative easing, which could spur capital flight in Hong Kong where locals start spending more offshore.
Moody’s will be considering a credit rating upgrade on Wing Hang Bank upon the acquisition by OCBC.
OCBC first entered the Chinese market with its 2006 acquisition of Bank of Ningbo at 12.2 per cent of its enlarged issued and paid-up capital.
It has now raised its stake to 20 per cent since a January 14 announcement.
2. Why did allowances for loans and other assets increase by S$20 million?
Banks lose money lent to customers who cannot pay, and we are curious to know what types and industries these customers are.
Are there new strategies to reduce this phenomena?
3. How much did the customer affecting business in Malaysia loan?
OCBC’s non-performing loan (NPL) ratio fell 50 basis points to 2.3 per cent in Q1 and it attributes this to a customer in the steel business.
What was the size of the loan and how much of it is outstanding?
Is there a new time frame drafted to recover this amount from the customer?
What guarantees have been given for this loan in the event it cannot be repaid?
4. What properties in Malaysia does Horizon Asset Management hope to capture?
While there is the issue of bad debt in its Malaysia operations, OCBC appears undeterred and is trying to capture more revenue with its new asset management company, Horizon Asset Management Sdn Bhd.
The April 28, 2014 announcement states it is 49 per cent-owned by KIM Limited, an OCBC wholly-owned subsidiary, and the other 51 per cent by Sharosu Assets Sdn Bhd.
Which property types are in target?
How diverse will this portfolio be?
There was nothing to be found on Sharosu Assets on the Web, and Handshakes did not bring up anything other than the relations between Sharosu, KIM and OCBC already mentioned.
5. Who is Sharosu Assets Sdn Bhd?
While it is a private company, investors would naturally like to know who owns and runs it.
By its name, and its investment with OCBC in Horizon Asset Management, it is obviously in properties investment.
But what else could it be doing?
6. How will Sharosu Assets dictate operations with its 51 per cent control?
Sharosu Assets has majority control in Horizon Assets, so it is a question what it will do in dictating the properties investment directions of Horizon Assets Management.
7. Why did it take so long to dissolve Tat Lee Warehousing?
It first announced the proposal to dissolve subsidiary Tat Lee Warehousing Pte Ltd on September 28, 2012.
After nearly two years, this has been confirmed through this May 2, 2014 announcement.
Why has it taken so long for this action?
We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.
So far, we have not had a reply (which is why you are seeing this message).
— Investor Central
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