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Citi maintains ‘neutral’ call on OCBC after Great Eastern’s proposed acquisitions

Felicia Tan
·2-min read

To analyst Tan Yong Hong, the deal is likely to be immaterial to GEH’s financials but will be capital accretive for AMMB.

Citi Research analyst Tan Yong Hong is remaining “neutral” on Oversea-Chinese Banking Corporation (OCBC) after its 88.4%-owned insurance subsidiary, Great Eastern Holdings G07 (GEH) announced that it was acquiring AMMB’s AmMetLife Insurance Berhad (AML) and AmMetLife Takaful Berhad (AMT) for RM1.12 billion ($325 million).

To Tan, the deal is likely to be immaterial to GEH’s financials but will be capital accretive for AMMB.

According to AMMB’s annual report for the FY2023 ended March, AML contributed RM76.1 million to its overall profit after tax (PAT) for the 12-month period. This is in comparison to GEH’s PAT of $786.9 million and retained earnings of $10.1 billion for the FY2022 ended Dec 31, 2022.

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However, the acquisition could enhance GEH’s distribution channel in Malaysia and give it access to AML’s pool of insurance agents in the country.

Meanwhile, the acquisition by GEH could lift AMMB’s common equity tier 1 ratio (CET1 ratio) by 0.9 percentage points or 90 basis points (bps).

“Under Pillar-3 disclosures, AMMB group’s consolidated capital ratio exclude investment in insurance entities and joint ventures (i.e. deducted from regulatory capital). Based on latest 1QFY releases, “investments in capital instruments of unconsolidated financial and insurance/Takaful entities” is RM1.33 billion (1.09% of risk-weighted assets or RWA),” says Tan in his Oct 2 report.

“Using a simple pro-rating of AML relative cost as percentage to investment in associate/joint venture (JV), AMMB’s capital could be lifted by a further 45 bps. Together with cash received RM561 million (46 bps of RWA), the capital accretion for divesting a JV could be meaningful at 90bps (1QFY2024 CET1 ratio: 12.588% excluding transitory arrangements),” he adds.

In his report, Tan has also kept his target price on OCBC at $12.70, which implies a P/B of 1.0x based on the bank’s FY2023 and FY2024 earnings estimates.

Shares in OCBC closed flat at $12.80 while shares in GEH closed 3 cents higher or 0.17% up at $18.03 on Oct 3.

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