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‘Not cheap’, ‘no value’ but market excited: OCBC’s GEH bid divides analysts

Jovi Ho
Jovi Ho • 9 min read
‘Not cheap’, ‘no value’ but market excited: OCBC’s GEH bid divides analysts
“OCBC’s bid to privatise Great Eastern has limited synergistic value” and “returning excess capital to shareholders is a better option”, says Maybank Securities analyst Thilan Wickramasinghe. Photo: Albert Chua/The Edge Singapore
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Oversea-Chinese Banking Corp (OCBC) O39 -

may have mounted a $1.4 billion privatisation offer for Great Eastern Holdings G07 - (GEH) G07 - but the process could end much earlier than expected.

In a May 10 report following a briefing by OCBC management that morning, Citi Research analyst Tan Yong Hong points out that OCBC already holds 88.4% of GEH shares. Hence, the bank only needs an “incremental” 1.6% of shares to trigger the delisting of the insurer from the Singapore Exchange S68 -

, instead of the full 11.6% held by minority shareholders.

To bring GEH’s required free float under 10%, OCBC is looking at a capital outlay of some $189 million, or 0.1% impact to capital, based on the $25.60 per share offer price.

Hence, Tan believes OCBC is unlikely to increase its offer price, which represents a 36.9% premium over GEH’s pre-announcement close price of $18.70 on May 9. Trading resumed at midday on May 10, and GEH shares closed 37.5% higher at $25.72 that day — a five-year high.

That said, OCBC’s offer price is still at a significant discount to GEH’s embedded value of $36.59.

While the market is likely excited on the potential to upstream some $3 billion in GEH’s unrestricted cash as dividends, Tan is “sceptical” as GEH has been designated as one of Singapore’s four domestic systemically important insurers (D-SIIs) by the Monetary Authority of Singapore.

See also: OCBC's offer for GEH opportune following switch to IFRS 17; offer is too low, say minorities

The D-SII framework came into effect on Jan 1, subjecting GEH to higher capital requirements like a 25% capital add-on, along with common equity tier-1 (CET-1) and tier-1 capital requirements.

OCBC last acquired 2.3 million GEH shares at $16.99 each for a total of nearly $40 million in June 2023, which brought its shareholding up from 87.9% to its current 88.45%.

Tan is staying “neutral” on OCBC with a $13.40 target price, unchanged from his previous report dated April 15, “as the potential for capital return (extent and timing) is unknown”.

See also: OCBC ‘not in the business of providing liquidity’ for Great Eastern

He thinks all the possible benefits for acquiring GEH shares “appear priced-in”. Post-acquisition, OCBC would record 0.2% higher pro-forma return on equity (ROE), adding 30 cents to Tan’s target price.

‘Limited synergistic value’

Maybank Securities analyst Thilan Wickramasinghe is pessimistic about the deal. In a May 10 note, he says “OCBC’s bid to privatise Great Eastern has limited synergistic value” and “returning excess capital to shareholders is a better option”.

The deal is not cheap, says Wickramasinghe, staying “hold” on OCBC with a target price of $15.21, up from $14.05 previously. “We are unclear of incremental synergies that could accrue by acquiring the 11.56% of GEH that OCBC does not already own. The business already has [the] top two bancassurance market share and the accounts are already consolidated.”

At 0.7 times price to embedded value (P/EV), the deal “implies no value to new business potential of GEH” as it is below one time, says Wickramasinghe. “EV is the present value of future profits of policies already sold.”

To Nick Lord and his team at Morgan Stanley Research, the 60 bps (basis-point) CET-1 cost to OCBC will “lower near-term excitement on capital returns”. Lord’s target price is below Maybank’s, at $13.61.

See also: OCBC 1QFY2024 net profit up 22% q-o-q, 5% y-o-y to $1.98 bil

CGS International’s (CGSI) Andrea Choong and Lim Siew Khee think the deal is “expensive” at P/EV, compared to an average 0.5 times for Hong Kong insurers under CGSI’s coverage.

That said, full ownership of GEH could raise net profit by an incremental $100 million per annum, they add.

In a May 10 note, CGSI has maintained “add” on OCBC with a higher target price of $15.40, from $14 previously.

Meanwhile, Goldman Sachs analysts Melissa Kuang and Olivia Shi think this “could be one step forward to improve group capital management”. “Our previous analysis showed that GEH had $2.4 billion surplus held… weighing on its ROE. A potential full ownership would enable OCBC to better manage capital from a holistic group perspective, with the capability to more efficiently allocate the excess capital to other areas in the group with better growth prospects or to return to shareholders.”

In a May 10 note, Kuang and Shi forecast OCBC’s dividend payout ratio rising to 55% for FY2024 and further to 57% by FY2026. This will be up from OCBC’s FY2023 dividend payout ratio of 53%.

The Goldman Sachs analysts maintain “buy” on the bank with a $16.80 target price, higher than Citi’s.

OCBC’s 1QFY2024

But the biggest bull on OCBC is UOB Kay Hian Research (UOBKH), which is staying “buy” with a slight trim to its target price at $18.10, down from $18.15 previously.

UOBKH’s price target is the highest among research houses, followed by Morningstar’s $17 fair value.

“While we think shares are undemanding at current level, we continue to prefer DBS among Singapore banks given stronger potential for dividend growth,” writes Morningstar’s regional director Lorraine Tan.

OCBC reported net profit of $1.98 billion for 1QFY2024 ended March, up 5% y-o-y and up 22% q-o-q, above UOBKH’s forecast of $1.82 billion.

While net interest margin (NIM) eased 2 bps q-o-q to 2.27%, loans expanded 2% y-o-y, driven primarily by Singapore. Net interest income (NII) grew 4% y-o-y.

Non-interest income was a strong contributor, rebounding 47% q-o-q to $1.19 billion in 1QFY2024. Of this figure, net fee income was $479 million, up 4% q-o-q and 6% y-o-y. Contribution from wealth management increased 17% q-o-q and 20% y-o-y.

OCBC attracted net new money inflow of $6 billion in 1QFY2024, while assets under management (AUM) increased by $10 billion, or 4% q-o-q, to $273 billion. Net trading income surged 45% y-o-y to $370 million.

Further on GEH, the insurer has the largest agency force of 5,000 in Singapore and 30,000 in Malaysia. It has 16 million policyholders in Singapore and Malaysia.

To OCBC, contributions from life and general insurance expanded 21% y-o-y to $289 million in 1QFY2024.

PhillipCapital downgrades OCBC

On the other hand, OCBC earned a downgrade to “accumulate” from PhillipCapital Research analyst Glenn Thum. In a May 13 note, Thum cites the bank’s total allowances, which rose 54% y-o-y to $169 million in 1QFY2024, mainly due to a rise in special provisions to $180 million from $56 million a year ago.

That said, total allowances fell 9% q-o-q. Non-performing assets (NPAs) rose 5% q-o-q but fell 9% y-o-y to $3 billion, as net recoveries/upgrades and write-offs were offset by new corporate NPA formation.

Non-performing loan (NPL) ratio of 1.0% was flat q-o-q and lower than the 1.1% in the prior year. Total credit costs rose 4 bps y-o-y but fell 5 bps q-o-q to 16 bps.

Thum also expects expenses to continue rising. Operating expenses rose 8% y-o-y and 3% q-o-q to $1.35 billion, mainly from higher staff costs.

Nonetheless, 1QFY2024 cost-to-income ratio (CIR) was stable y-o-y at 37.1%, down from 40% in the previous quarter. OCBC is guiding for CIR of around 40%–45% for FY2024 as costs are expected to grow while income moderates.

Thum attributes his downgrade to OCBC’s “recent share price performance”, up more than 4% over the past month and up 10% over the past six months.

However, he has raised his target price to $15.40 from $14.96, while increasing his forecast on OCBC’s fullyear earnings by 2%. “We like OCBC due to attractive valuations and a dividend yield of 6.2%, buffered by a well-capitalised 16.2% CET-1, and non-interest income growth from recent acquisitions,” says Thum.

DBS and RHB ‘neutral’

DBS Group Research and RHB Bank Singapore analysts were tepid on the bank’s stock, remaining “hold” and “neutral” with lifted target prices of $14.90 and $14.80 respectively.

Every 1 bps change in the interest rate applicable to OCBC’s four major currencies will impact NII by $5 million to $6 million on an annualised basis, down from last quarter’s guidance of $6 million to $7 million.

The bank now assumes two rate cuts in 2H2024, down from three to four rate cuts for the year previously. Hence, management has revised its NIM guidance to the higher end of the 2.20% to 2.25% range.

DBS sees “limited catalysts ahead” for OCBC’s share price with rising asset quality risks. “We believe the downside to OCBC’s share price will be supported by its strong NPL coverage ratio of 146%.”

RHB is more placid on the potential GEH privatisation. “If successful, the impact will not be too significant on earnings or capital, but there could be capital management opportunities… If the offer fails, we do not discount the possibility of OCBC returning this (or a portion of) 60 bps CET-1 (31 cents) as dividends.”

Singapore banks ‘strong’

OCBC was the last of Singapore’s three banks to report 1QFY2024 results. All three delivered “strong earnings” last quarter, says UOBKH analyst Jonathan Koh, owing to a pick-up in loan growth, a recovery in wealth management and a surge in trading income.

According to Morningstar, OCBC and United Overseas Bank U11 -

(UOB) beat consensus expectations by 10% with their net profits after tax, while DBS Group Holdings bested forecasts by 14%. Between DBS and OCBC,

UOBKH’s Koh prefers OCBC “due to the potential to deploy surplus capital to generate inorganic growth”.

Meanwhile, Citi’s Tan says higher-for-longer expectations for interest rates are already priced-in, and “if expectations unwind”, UOB is most at risk, followed by OCBC and then DBS. The latter bank is the only “buy”, according to Tan, with a $40 target price.

In a May 14 note, Tan has downgraded UOB to “neutral”, with a lower target price of $30.50. He points to a widening wealth AUM gap against its peers, driving the softest fees momentum. After integrating its Citi acquisitions, UOB needs to execute on revenue by cross-selling deposit and wealth AUM; and cost synergies by improving CIR to boost investor sentiment.

RHB and Maybank are similarly bullish on DBS, maintaining “buy” in their latest reports while upgrading their target prices to $38.90 and $38.87, respectively.

“Despite its current dividend policy of 54 cents [per share] on an enlarged share base, DBS is likely to accrue more capital than it pays out,” says Maybank’s Wickramasinghe in a May 2 note. “We expect further capital management actions, including potential special dividends, going forward.” 

Photos: Albert Chua and Samuel Isaac Chua/The Edge Singapore

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