OCBC offers scrip dividend (ST)

OCBC's fourth quarter results are broadly in line with the lower earnings reported by DBS Group last Friday.

Its core earnings for October to December fell a staggering 41 per cent to $250 million even though it managed to grow the income it got from its core banking business by 28 per cent to $783 million.

This is due mainly to a sharp 44 per cent drop in non-interest income to $259 million and a big jump in provisions for bad loans to $243 million from a mere $13 million in the same period last year.

Rather than do a rights issue, it plans to reactivate its scrip dividend scheme and give shareholders the option to receive the final payout of 14 cents a share in the form of shares. It is sweetening the move by setting the issue price for the new shares at a 10 per cent discount to the average closing price of OCBC between the ex-dividend date and the book closure date.

If all investors take up the dividend in the form of scrips, the bank can retain $437 million in capital - a tidy sum not to be sniffed at. Given the current depressed level of its share price - it now trades at a six-year low - some investors may well take up the offer.

OCBC 4Q08 earnings preview - HOLD (Kim Eng)

Previous Day Closing price: $5.08
Recommendation: Hold (maintained)
Target price: $5.10 (maintained)
Yield: 5.0% (2008F)

OCBC will be releasing its 4Q08 results on 18 Feb. We are expecting the group to post a net profit of $382m in 4Q08 which is moderately below Bloomberg consensus estimates of $389m. Assuming that its dividend payout policy stays at 45%, a final DPS of 9 cents could be expected.

Insurance income is likely to stay subdued (we are expecting a 24% y-o-y decline) as more than 50% of GEH’s revenue is derived from investment profits that are hard to replicate in the current environment. The surge in life assurance profits led by mark-to-market gains seen in 3Q08 is highly unsustainable.

OCBC’s Tier-1 CAR of 14.4% is currently the highest among the Singapore banks after it raised 2 preference share issues of up to $2.5bn last year. The preference shares carry a fixed dividend rate of 5.1% per annum, payable semiannually. Its strong Tier-1 CAR that way exceeded MAS’s requirement of 6%, provides a good safety net to cushion against the downturn.

We believe OCBC’s current premium valuations to the sector average of 0.9x PBV reflect its superior capital strength. We are keeping our Hold rating on the stock and prefer an entry level of $3.60 on 0.8x book value as at Sep 08.