OCBC announced a renounceable 1-for-8 rights issue

OCBC announced a renounceable 1-for-8 rights issue on 18th August 2014 which is up to 440m new ordinary shares. The issue price of the rights shares will be at 25% discount to closing price as at 15th August 2014 (Closing Price: S$10.20) which prices each rights share at S$7.65, and will be traded ex-rights on 25th August 2014. The total equity raised from this will be approximately S$3.37bn, which is ~10% of current market capitalization.

In terms of OCBC’s capital position on a transitional basis, CET 1 and Tier 1 CAR will be reduced to 13.2% from 14.6% pro forma. On a fully loaded basis, CET 1 CAR will drop from 11.3% to 10.2% pro forma. Management believes that the acquisition will be accretive to OCBC’s EPS and ROE by 2017, and will continue to manage their capital organically such as utilizing the scrip dividend scheme which had a high opt-in rate. They stick to their 3 guiding principles which are namely keeping regulatory ratios comfortably over regulatory requirements, comparable to their 2 peers and in line with their credit rating. Management has is also looking at divestment opportunities for non-core assets.

OCBC continues to put focus on their 4 key markets, namely Singapore, Malaysia, Indonesia and Greater China, and core business of Retail and Commercial Banking, Wealth management and Insurance. They place emphasis on capturing trade and investment flows between Greater China and Southeast Asia and capitalizing on cross border wealth management opportunities, as well as building a deposit funding base in USD and RMB.

Management has also shared that integration costs for the WHB acquisition will be ~S$40m-50m and will continue to incur cost down the road from system and technology related areas. 40%-50% of core earnings will be declared as dividends and we can expect cost-income ratios in the low 40% region and 11%- 12% for ROE.

How do we view this? Previously, our opinion was to remain cautious as we were weighing the potential benefits against the WHB acquisition. EPS and ROE accretion is only expected by 2017. We had previously estimated (2nd April 2014) that prior to capital raising, their fully loaded CET 1 ratio which was 10.9% (2nd April 2014) will be shaved by at least 290bps before raising equity, meaning that at least S$2b of equity would have been needed to be raised down to maintain capital ratios at the required regulatory levels. We had expected some minor dilution to EPS and ROE as a result.