Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-06-28: Divesting Of Non-Core Businesses, Investing In Wealth Management

Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-06-28: Divesting Of Non-Core Businesses, Investing In Wealth Management OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - Divesting Of Non-Core Businesses, Investing In Wealth Management

  • OCBC has agreed to divest of its 33.3% stake in Hong Kong Life Insurance for S$426m and has embarked on a strategic review of its stakes in UE and WBL.
  • Proceeds from these divestments would be re-invested into its core wealth management business and high-growth emerging markets, such as Indonesia and China. 
  • Maintain BUY. Target price: S$11.70.



WHAT’S NEW


Potential sale of non-core assets. 


UE has attracted many suitors. 

  • UE’s core businesses comprise property development, hospitality, engineering and distribution. It owns UE BizHub CITY, UE BizHub EAST and mixed development One-North. It also owns a stable of shopping malls, including Rochester Mall, Seletar Mall and UE Square Shopping Mall. 
  • UE made a general offer for WBL at S$4.50 in 2013 and owns 96.3% of WBL. 
  • Perennial Real Estate and its consortium partners have submitted a bid to acquire UE. Other bidders could include KKR & Co, Haiyi Holdings, Samling Group and Ascendas-SingBridge.

Small positive impact from divestment of UE. 

  • Total proceeds from the divestment of the combined 16.7% stake in UE would be S$292.8m, based on current market price of S$2.75/share. We estimate the positive impact on CET-1 CAR, currently at 12.2%, by up to 12bp assuming Great Eastern distribute its share of proceeds as special dividend.

Small-scale acquisition in consumer financial services. 

  • OCBC has agreed to acquire National Australia Bank’s (NAB) private wealth business in Singapore and Hong Kong at about 1x P/B. The business comprises a US$1.7b mortgage portfolio (half of the properties in Australia, mainly Sydney, Melbourne and Brisbane, and the rest in the UK, Hong Kong, New Zealand and Singapore) and deposits of US$3.1b (in A$, HK$, S$ and US$). It has 11,000 customers across two markets (Singapore: 7,000, Hong Kong: 4,000). This is a small acquisition that will marginally boost OCBC’s total loans by 1.1% and total deposits by 1.5%. 
  • The acquisition is expected to complete by end-17 and would be earnings accretive within the first year after completion.

Expanded into onshore private banking in Indonesia. 

  • OCBC has launched onshore private banking in Indonesia through 85%-owned OCBC NISP. OCBC NISP has obtained regulatory approval to set up a private banking unit to manage more than US$1m in Indonesia. The team has five experienced private bankers and is expected to double in size by end-17. 
  • Private banking clients who are business owners could also tap on OCBC NSIP’s commercial banking solutions.


STOCK IMPACT


Consistent strategy of re-investing in core businesses. 

  • OCBC has a consistent strategy of divesting of non-core assets and re-investing in its core wealth management business and high-growth emerging markets, such as Indonesia and China. 
  • It has agreed to sell its 33.33% stake in Hong Kong Life Insurance to First Origin International for HK$2,366.7m (S$425.9m) cash. Proceeds from the divestment of its stakes in UE and WBL would also be re-invested in its core businesses.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$11.70 is based on 1.30x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.8%, COE: 7.75% (Beta: 1.05x) and Growth: 1.0%).
  • The stock provides an attractive dividend yield of 3.4%.


SHARE PRICE CATALYST

  • Growth from regional markets in Malaysia, Indonesia, Hong Kong and China.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.700 Same 11.700



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