OCBC

OCBC: is one of the biggest laggards among the STI’s constituents, contributing more than 33 points of the index’s 176 points downside movement since the start of the year. Recent newsflow suggests that OCBC’s acquisition of Wing Hang Bank has a greater probability of happening than previously thought – Macquarie believes this could mean more downside for OCBC’s shares. Media (eg Reuters) are reporting a bid price of 2x P/BV or roughly US$5.3b. Macquarie believes some form of share dilution (est 9-10%) is inevitable, in order for the bank to fulfil regulatory capital requirements. Macquarie estimates OCBC will require a min of $2.7b in new capital to fund the deal and maintain an 11% CET1 ratio. However, the house struggles mroe to understand the economic rationale for paying 2x P/BV for a 9-10% ROE business in Hong Kong’s de-rated market competing against major incumbent players with better positions both in HK and China, and where cost synergies are not at all evident. Pending clarity on the deal, presumably within the next month (3 Mar), Macquarie maintains Neutral on OCBC and cuts TP to $9.50. Notes as a general statement, selling acquirers and buying acquisition targets is not a bad tactic when trading on bank M&A news, and the shares of both banks may reflect this in the short term. Similarly, Macquarie expects a sharp reversal if pricing disagreement or regulatory concerns scuttle a deal.