OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-09-25: Assessing Reduced Stakes For Great Eastern’s Malaysian Business

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OCBC Bank (OCBC SP) - Assessing Reduced Stakes For GE’s Malaysian Business

30% domestic ownership requirement by BNM 

• OCBC’s 87.9%-owned insurance arm, Great Eastern (GEH) (GE SP, Not Rated), is now reviewing possible options related to a minority stake in Great Eastern Life Assurance (Malaysia). This is to comply with Bank Negara Malaysia’s requirement of at least 30% domestic ownership. 
• Our analysis of a potential stake sale for both its life and general insurance business shows that one-off gains may raise OCBC’s FY18E profit by 6-20% and fully-loaded CET1 may improve by 18-45bps. Should proceeds from the sale be reinvested into other opportunities, and reducing 30% minority interests (MI) to earnings from GEH’s Malaysian business, there will be limited near-term impact to OCBC’s earnings. 
• In the long term, however, there may be negative implications for OCBC, as higher MI could reduce profits from GEH’s Malaysian business.

Potential one-off gains raise OCBC’s profits by 6-20% 

• Due to a lack of details, our analysis is based on broad assumptions. We assess two scenarios:
  1. assume 30% stake sale of its life and general insurance business in Malaysia fetches SGD1.35b (WSJ reported to fetch ~USD1b); and
  2. apply 3x P/BV transaction multiple, in line with recent Malaysian insurers’ deals. 
• We estimate that one-off gains from the sale could increase OCBC’s FY18E profit by 6-20%, FY18E BVPS by ~1-2% and fully-loaded CET1 ratio to improve by 18-43bps.
• Assuming sale proceeds of SGD661m or SGD1.35b be reinvested at GEH’s ROEs of 9.2% (ROE in FY16) and 14.4% (average ROE from FY07-16), and factoring in the reduction of 30% MI to earnings from Malaysian business, we estimate that GEH’s ROEs have to be at least 6.1% and 12.5% to breakeven. There will be limited near-term net impact to OCBC’s earnings.

Long-term downside risks 

• Great Eastern Holdings (GEH) is a dominant player in Malaysia with 23% market share in life insurance by net premiums. It is in a favourable position for further growth momentum in an under-penetrated market for insurance. 
• GEH’s new business embedded value (NBEV) margin for Malaysia was higher at 45% on average from FY10-16, vs Group’s/Singapore’s 42%. Complying with BNM rule means GEH has to share at least 30% of their profits from Malaysian business and/or pay dividends to minority shareholders in future. 
• Furthermore, it is possible that the stake sale could be higher than 30%. These may have negative implications to OCBC.

Maintain HOLD 

• Our estimates and Target Price of S$11.05 are unchanged pending further details. 
• Risks to our call:
  1. NIM improvement from higher rates;
  2. higher non-interest income; and
  3. lower provisions.

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OVERVIEW

• Great Eastern Holdings (GEH)’s life and general insurance business in Malaysia are currently wholly-owned subsidiaries. These businesses would have to pare down a 30% stake each to comply with Bank Negara Malaysia’s maximum of 70% foreign ownership.

Impact to OCBC on stake sale 

• We assess two scenarios on the impact on OCBC from a stake sale.
  1. In scenario 1, if we assume 30% stake sale of GE’s life and general insurance business in Malaysia for a cash consideration of USD1b (SGD1.35b), this translates to a P/BV transaction multiple of 6.3x, which is higher than the recent multiples for regional insurance deals at 4.3x on average. After factoring in transaction costs and increase in minority interests (MI), we estimate potential one-off gains to OCBC to be SGD861m, which will increase OCBC’s FY18E net profit estimates by 20% (assuming transaction will take place in 2018). FY18E BVPS will increase by 2%. We estimate the fully-loaded CET1 ratio will improve by 45bps.
  2. In scenario 2, we apply 3x P/BV multiple, which is in-line with recent deals for Malaysian insurers. This implies that transaction price will be SGD661m. After factoring in transaction costs and increase in MI, we estimate potential one-off gains to OCBC to be SGD286m. This will raise OCBC’s FY18E net profit estimate by 6%. There will be minimal impact to FY18E book value. We estimate the fullyloaded CET1 ratio will improve by 18bps.
• If proceeds from sale of SGD1.35b or SGD661m is reinvested at 9.2% (GEH’s ROE in FY16) and 14.4% (GEH’s average ROE from FY07 to FY16), we estimate that the near-term financial impact to OCBC’s earnings will be limited. Based on our estimation, GEH’s ROEs have to be higher than 6.1% and 12.5% respectively to breakeven (i.e. net impact to be zero), after factoring in reduction of 30% MI to earnings from GE’s Malaysian operations.

Assessing long term implications 

• Malaysia’s insurance market currently remains under-served and under-penetrated.
• Its life and non-life insurance penetration levels (premiums as % of GDP) are still relatively low, at ~3.2% and ~1.6% respectively. Long-term growth momentum can be sustained with more penetration.
• GEH is a dominant player in Malaysia, with 23% market share for life insurance by net premiums. Malaysia is a core market for GEH, as it contributed ~31% of Group’s profit after tax in FY16. 
• GEH’s Malaysian business has been growing steadily over the past six years, as new business embedded value (NBEV) and total weighted new sales (TWNS) grew by ~6% and ~5% on average from FY10-16 respectively. NBEV margin for Malaysia at 45% was also higher than Group’s/Singapore’s margin of 42%. Therefore, the Malaysian market can be expected to grow faster in future as compared to Singapore.
• To comply with the BNM rules, it means that GEH’s higher earnings from Malaysian operations in future would now have to share with its minority shareholders, with the possibility of paying out dividends to these shareholders.
• Furthermore, the stake sale could be higher than 30%. These may have negative implications to OCBC.

SWING FACTORS

Upside

• Widening credit spreads from re-pricing of assets at higher interest rates.
• Higher non-interest income from wealth management and higher contributions from Great Eastern.
• Sharp and sustained rebound in commodity prices.
• Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages.
• Better demand for Singapore mortgages from easing of property-cooling measures.

Downside

• Oil prices stay low, sparking more NPLs in O&G support services.
• Job losses in Singapore become pervasive, hurting its mortgage portfolio.
• Sharp decline in value of trading securities and shocks in fixed-income portfolio.
• Lack of liquidity of a funding currency.
• Translation losses from MYR/IDR depreciation.
• Emergence of dominant financial competitors in Singapore.
• Capital-raising by peers may depress sentiment.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-09-25

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