SINGAPORE (Sept 26): Maybank Kim Eng is maintaining its “hold” recommendation on OCBC Bank with an unchanged price target of $11.05 pending further details of reduced stakes in the Malaysian business of its 87.9%-owned insurance arm, Great Eastern Holdings (GEH).
This comes after GEH last week announced it was assessing its options to sell its minority stake in Great Eastern Life Assurance (Malaysia) to comply with Bank Negara Malaysia’s (BNM) requirement of a minimum 30% domestic ownership in local insurance companies.
See: Great Eastern says mulling options linked to minority stake in Malaysian operations
In a Monday report, analyst Ng Li Hiang says the one-off gains GEH’s stake sale in both its life and general insurance businesses may raise OCBC’s FY18E profit by 6-20%, while its fully-loaded CET1 may improve by 18-45bps – in line with recent Malaysian insurers’ deals which were valued at about 4.3 times price-to-book on average.
“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,” says Ng.
However, he highlights potential negative implications for the bank in the long-term, as higher MI also implies a potential reduction in profits in GEH’s Malaysian business.
The analyst explains that this is because GEH is a dominant player in Malaysia with a 23% market share in life insurance by net premiums, which puts the company in a favourable position for further growth momentum in what an “underpenetrated market for insurance”.
“GEH’s new business embedded value (NBEV) margin for Malaysia was higher at 45% on average from FY10-16, versus the group’s/Singapore’s 42%,” says Ng.
“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,” he concludes.
As at 2.52pm, shares in OCBC are trading 1 cent lower at $11.15 or 1.1 time FY18 forward book value.
