Oversea-Chinese Banking Corp. Limited - Is a special dividend from GEH essential to boost capital ratios?

8/9/2014 – Oversea-Chinese Banking Corporation (OCBC), which says it is Southeast Asia’s second largest lender by assets, has announced (August 27) that it is in talks with Thailand billionaire Charoen Sirivadhanabhakdi and his wife to sell its entire 36% stake in United Engineers.

Bloomberg reported this news on August 20 which led United Engineers' stock price to jump 12%, and the company later confirmed it.

According to CIMB Research, this news does not come as a surprise as OCBC did mention that it was looking to divest some of its non-core assets to boost its capital ratios.

CIMB Research has maintained its ADD rating with a target price of S$11.70 as it believes that potential sales of other non-core assets, mainly properties, will help to raise OCBC’s capital buffer and will be positive for the stock.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Does OCBC desperately need a special dividend from GEH to boost capital ratios?

OCBC funded the US$5 bln or S$6.2 bln acquisition of Wing Hang Bank with S$3.3 bln cash from a rights issue and S$2.9 bln from debt and internally-generated cash.

According to CIMB research, OCBC’s CET1 capital ratio, will fall from Q2’s level of 11.3% to 10.2%, which leaves only a small buffer above the Monetary Authority of Singapore's 9% minimum in 2019.

This is also some way below DBS’s 12.2% and UOB’s 12.5%.

While the news of the capital raising is positive, the analyst estimates that the boost to OCBC’s fully-loaded CET1 ratio will be minimal at 10 basis points (bps) to 11 bps.

OCBC’s direct stake in United Engineers (UE) is only 0.97%, as of March 2014, which is worth S$14 mln at current market prices, and will add 1 bps in CET1 ratio.

The bulk of OCBC’s deemed interest in UE is held through its insurance unit, Great Eastern Holdings (GEH) and the Lee family.

OCBC will not benefit from the sale of the Lee family’s stake in UEM but will recognise additional capital if GEH declares a special dividend from the gains on the sale of its UEM stake.

Assuming GEH pays a special dividend equal to 80% to 90% of the value of its 16.37% stake, as of March 2014, in UE, it estimates that this will add S$160 mln to S$190 mln to OCBC’s CET1 capital, an addition of 9 to 10 bps.

Question

2. What other non-core assets does it have and when does it plan to divest them?

CIMB Research says other non-core assets are mainly properties while Maybank research says management highlighted a few non-core assets residing in Wing Hang Bank (WHB).

But it is in no hurry to sell.

Assets are only considered non-core if they are not required for the group’s banking business.

This means properties occupied by WHB as branches and headquarters would be deemed core and will not be disposed of.

Total number of questions in the full story: 6)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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