Two divestments to lift OCBC's earnings in 2018

It is finalising the sale of Great Eastern Life Malaysia and Hong Kong Life Insurance.

OCBC is working hard on two sizeable divestments to be finalised by the end of 2018. UOB Kay Hian said the two divestments could enhance its Common Equity Tier 1 capital adequacy ratio (CET-1 CAR) by 0.3ppt to 13.4%.

CET-1 CAR refers to the amount of common stock that the company holds as part of its capital weighted against its risk.

UOBKH analyst Jonathan Koh said the bank can unlock value through the initial public offering of Great Eastern Life (Malaysia) (GELM) in the second half of 2018. The life insurance subsidiary Great Eastern Holdings (87.8%-owned) is required to sell a 30% stake in GELM.

According to Koh’s estimates, the 30% stake could be worth $760m. “OCBC is expected to recognise divestment gains of $608m in Q4, which improves its CET-1 CAR by 0.2ppt,” he added.

Meanwhile, wholly-owned OCBC Wing Hang has agreed to sell its 33.33% stake in Hong Kong Life Insurance (HKLI) to First Origin International for $425.9m (HK$2.367b) cash. First Origin International is an investment holding company focusing on the financial and technology sectors in Asia.

“We estimate divestment gains at HK$2.1b ($378m), given that the unaudited net tangible asset value of HKLI was HK$793m as of Dec 16. We estimate the divestment would improve OCBC’s CET-1 CAR by 0.1ppt,” Koh said.

OCBC also plans to implement an internal ratings-based approach (IRBA) to compute risk-weighted assets (RWA) for OCBC Wing Hang by 2019. “OCBC Wing Hang’s RWA intensity was higher at 64% for 2017 vs 50.7% for OCBC on a group-wide basis. We estimate OCBC would be able to reduce its RWA by 4% if OCBC Wing Hang lowers its RWA intensity to 50% under IRBA, and this would improve OCBC’s CET-1 CAR by 0.6ppt,” Koh added.

OCBC will also evaluate reinstating its scrip dividend scheme as a tool for capital management, which supports a higher dividend payout ratio. A scrip dividend scheme ensures that a greater portion of earnings is retained to support future growth, whilst concurrently rewarding shareholders with a higher dividend payout.

Koh noted that with the scheme, OCBC’s CET-1 CAR would be enhanced by 0.7ppt for 2018, assuming new shares are issued at 10% discount to current share price of $12.99 and shareholders’ acceptance rate for scrip dividends is 80%.

OCBC plans to maintain dividend payout ratio at 40-50% of core earnings, which can support growth of 6-7% for RWA and 10-12% for total assets. “It sees sufficient opportunities for organic growth in key pillars of its businesses,” Koh concluded.