OCBC Stock at a Glance
- Fair Value Estimate: SGD 16.00
- Morningstar Rating: 4 stars
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
OCBC Earnings Update
We maintain our fair value estimate of SGD 16 for narrow-moat Oversea-Chinese Banking, or OCBC, after news that it was the top bidder for Commonwealth Bank of Australia’s Indonesian unit PT Bank Commonwealth, or PTBC. The upfront cash payment is AUD 220 million, less than PTBC’s net assets as of June 2023 of around AUD 390 million. We do not think OCBC is overpaying even if the complete terms that allowed its bid to prevail over other interested parties end up costing more than the upfront payment. That said, PTBC, with an estimated market share of loans in Indonesia of less than 0.2%, is not a strongly competitive bank, with a return on equity of around negative 11% in 2022. We think the key for OCBC will be integrating PTBC smoothly into its Indonesian unit Bank OCBC NISP, so that PTBC’s contribution to NISP’s future earnings is larger than the acquisition cost and any potential further losses at PTBC.
For investors in OCBC’s Singapore-listed shares, we think the good news is that this kind of bolt-on acquisition is small enough that it shouldn’t affect OCBC’s decision on the size of its year-end dividend, in our view. Though OCBC’s policy is to pay out 50% of earnings as dividend, we forecast that it will pay around 54%-55% this year (and 55% in 2024) given its common equity Tier 1 ratio of 14.8% as of September. We estimate the negative impact of the PTBC acquisition on OCBC’s CET1 ratio to be around 30 basis points.
Michael Makdad, senior equity analyst at Morningstar
