OCBC is still growing

Once again, Overseas-Chinese Banking Corporation (OCBC) is dishing out to scrip dividends to existing shareholders. With the discount of 10%, this translates to a mouth-watering conversion rate of $9.57 per share. Given the steep discount, it is likely that many existing shareholders would choose scrip dividends over cash unless the bank share price tanks unexpectedly from now to 18th September. After all, we all learn about power of compounding and it makes sense to continue to invest in this bank whose history existed even before the 2nd world war.

In an effort to keep up with the growing dividends offered by other banks, the declared dividend for the 1st half of 2019 financial year is $0.25 share and is 2 cents higher than that declared for the second half of financial year 2018. Over a period of 10 years, the annualized increment in dividend rate in spite of its increasing share base translates to about 5.8%. With the latest declared dividend of 25 cents per share, it translates to a hefty distribution of more than S$1billion in dividends just for the 1st half of 2019 alone. With the huge dividend payout, and relatively low conversion rate, it is likely to push more shares in the float. It is certainly no child’s play.

But then, why does the bank want to offer scrip dividends to expand its share base? Certainly, it is going to affect the return on equity (ROE) going into the future, unless the bank can better deploy the conserved cash. Without dwelling too much into detailed calculations, the bank appeared to be purchasing its own shares from the market at between mid-$10 and mid-$11 on average, and this scrip dividend distribution at a discount of 10% would have benefited existing shareholders at the bank’s expense. After all, it had already met its CET-1 requirements and there is no necessity for the bank to conserve more cash. So, the only conclusion is expansion plans are on the card, and OCBC beefing its war-chest for such future acquisitions.

A few possibilities are:

  • Buy up the last 13% of Great Eastern shares (GE) and take it private. This is highly unlikely. OCBC had already tried 2 times (maybe more). The last was offered at $16 per share. Unfortunately, the die-hard shareholders held steadfastly to their shares that the take-over bid failed miserably at that time. Now with the share price oscillating between $25 and $30 per share, the possibility to buy up the last few percent is even more remote. It needs a huge premium to dislodge the shares from these shareholders’ hands. Given the expensive exercise, it is very likely that OCBC will leave it status quo and focus on other regional opportunities.
  • Buy up OCBC NISP. Possible, but comparatively unlikely. Again, the last 15% shareholders are likely to hold steadfastly to their shares. Furthermore, there is an authority to deal with, which can come in a surprise. Just a few years ago. DBS’s plan to buy Indonesia’s Danamon Bank (Indonesian’s 6th largest bank) was foiled by the authority placing a 40% limit by foreign institutions. Of course, there is a possibility that OCBC looks to acquire other Indonesian banks, but then it may not serve significant purposes given that it has already had a presence offering banking services there.  
  • Increasing its presence in the Greater Bay Area (GBA) in China. This appears to be more likely situation. The CEO has indicated 1-2 year ago that his target is to increase the return from the GBA over the next 5 years.  In all likelihood, more resources are likely to go into this region. To date, OCBC has a shareholding of about 12% in the Bank of Ningbo (BON). More recently, it had successfully, acquired Wing Hang Bank in Hong Kong. So, we should expect OCBC to push its growth trajectory for this region.

But then again, to shareholders, growing and acquisitions would mean taking on more risks. If we choose to take the scrip dividend in lieu of cash, we are in a way proportionally taking part in the risk-sharing process made by the bank, for good or for bad. The risk part of the equation, quite often, is conveniently forgotten or, perhaps, obscured by the attractive scrip dividend conversion rate.  

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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