The devil is in the details: OCBC battles headwinds as WHB funding exercise begins

Execution may prove harder than expected.

OCBC has already won many battles in its quest for Wing Hang Bank. But the hardest part of its takeover has just begun: OCBC has just unveiled its proposed rights issue to finance its newest acquisition.

According to a report by Maybank Kim Eng, the management’s execution plan looks good on paper but is likely to face headwinds in actual execution.

“On paper, potential revenue synergies look good. Like any M&A, the critical part is management’s ability to execute its plan. In our view, the market is likely to stay unconvinced until concrete results emerge. In our view, these are only likely in 2H15E, at the earliest. Management expects the acquisition to turn EPS- and ROE-accretive only three years from now,” noted the report.

Here’s more from Maybank Kim Eng:

Management painted sanguine prospects in yesterday’s briefing on the bank’s rights issue to finance its acquisition of Wing Hang Bank (WHB).

There are revenue synergies by leveraging WHB’s presence in the Pearl River Delta and cross-selling each other’s specialised products. A larger platform in Greater China should help OCBC capture trade and investment flows in the region, capitalise on rising affluence in Greater China and build a stronger deposit base in USD and CNY.

We estimate the rights (SGD3.3b at SGD7.65 apiece) will dilute our FY15E/16E EPS by up to 4%, translating into ROE dilution of 0.4ppt for both years.

The rights issue would restore OCBC’s transitional common equity Tier 1 (CET1) to 13.2% vs DBS’s 13.5% and UOB’s 13.9%. Its scrip dividend scheme will remain a key feature for raising CET1 higher. We have yet to factor in WHB’s financials. On a pro-forma basis, our TP is unlikely to change much.

Upbeat management. Management attempted to provide clarity during yesterday’s briefing on its SGD3.3b rights issue and business plan for the merger.

It sounded upbeat and highlighted areas of opportunity: Leveraging WHB’s presence in the Pearl River Delta. Cross-selling each other’s specialised products and harnessing each other’s strengths. Management’s confidence is premised on Asia’s faster growth vis-à-vis many other regions in the world, with China being a key growth driver.