OCBC

OCBC: UOB Kay Hian note that investors should be relieved that OCBC did not pay above P/B of 2x for Wing Hang (WHB). Management has done well in extracting the best possible pricing. WHB is conservatively managed and has a strong franchise for SME banking andserves as a springboard for further expansion into Greater China. To re-cap, OCBC has made a conditional cash offer for WHB at HK$125 per share. The offer values WHB at HK$38.4b or $6.2b. The pricing represents P/B of 1.77x based on WHB’s BVPS of HK$70.59 as of Dec 13. OCBC has received irrevocable undertakings from WHB's major shareholders, Fung family and BNY International Financing Corp, to tender 137.7m WHB shares or 44.8% of WHB. OCBC has also obtained additional irrevocable undertaking representing 3.4% of WHB and entered into agreement to acquire another 2.5% of WHB from Aberdeen Asset Management. In total, the shares to be acquired or subject to irrevocable undertakings represent 50.7% of WHB. Thus, the offer is likely to become unconditional once OCBC obtain approvals from MAS, HKMA and other regulators. OCBC intends to retain the Wing Hang brand. Management expects regulatory approvals to be obtained by Jun 14 and the offer should close in Aug 14. The acquisition would be funded by a mix of internal cash resources and by raising new debt and equity capital. Management will embark on fund raising after the transaction is completed and details will be disclosed at a later stage. Management stressed the need to be prudent and to maintain adequate capital with a comfortable buffer above regulatory requirement. Management agrees that capital can be raised gradually over time but did not link such a move to its scrip dividend scheme. Management expects the acquisition to be accretive to EPS and ROE by 2017. It is estimated that the acquisition will reduce OCBC's common equity tier-1 (CET-1) CAR from 14.5% to 11% assuming no external funding. Fully-loaded CET-1 CAR would be reduced from 10.9% to an estimated 7.4%. On a pro forma basis, the acquisition will increase contribution from Greater China from 6% to 16% of group pre-tax profit. The acquisition will diversify OCBC’s customer base and extend its reach into North Asia. OCBC will be able to capitalise on the growth in flows of trade and investment between North Asia and ASEAN through its expanded presence in Greater China. According to SWIFT, RMB has become the second most widely-used currency in trade finance. Renminbi share of trade activities has expanded from 1.9% in Jan 12 to 8.7% in Oct 13. Overall, UOB Kay Hian estimate that OCBC needs to raise $2.7b of equity capital if management wants to bring fully-loaded CET-1 CAR at end-13 to 9%. Scrip dividend will then be utilised to build a capital buffer above the minimum requirement of 9%. OCBC will have to place out 316.1m new shares at 10% discount to current share price or $8.58. The mix of funding via equity capital and new debt is estimated at 43.5%:56.5%. Goodwill non consolidation is estimated at S$2.7b.