Markets can' t ignore election of new Pope

This beats the S$1.86 billion consensus forecast in a Bloomberg survey

 

[SINGAPORE] OCBC&rsquo s : O39 -0.06% net profit for the first quarter fell on lower net interest income and higher operating expenses.

 

Net profit for the three months ended Mar 31, 2025, stood at S$1.88 billion, compared with S$1.98 billion from the year-ago period, it said on Friday (May 9).

 

The earnings were 12 per cent up from Q4&rsquo s S$1.69 billion and beat the S$1.86 billion consensus forecast in a Bloomberg survey of five analysts.

 

It was the last of Singapore&rsquo s three lenders &ndash together with UOB and DBS &ndash to release its quarterly results this season.

 

Net interest income for the quarter fell 4 per cent to S$2.35 billion, due to a falling interest rate environment. Net interest margin was down 23 basis points to 2.04 per cent for the quarter, from 2.27 per cent in the previous corresponding period.

 

Non-interest income was up 10 per cent to S$1.31 billion, on stronger fees, trading and insurance income.

 

The bank&rsquo s non-performing loans ratio was 0.9 per cent, down from 1 per cent in the same period a year ago.

 

Operating expenses rose 5 per cent from the same period a year ago to S$1.42 billion, driven by higher staff costs from annual salary adjustments and volume-related compensation, as well as &ldquo continued investments in technology&rdquo .

 

Total allowances grew by 25 per cent to S$212 million for the quarter. This comprised S$94 million in allowances for impaired assets, lower than in the previous quarter and the year before.

 

It also included S$118 million in allowances for non-impaired assets, arising from changes in credit risk profiles and management overlays set aside amid heightened macroeconomic uncertainties.

 

Helen Wong, group chief executive officer at OCBC, said: &ldquo Looking ahead, the heightened uncertainties brought about by the shifts in trade policies and geopolitical risks are expected to have a dampening effect on overall economic growth in the region.&rdquo

Many GEH minorities want their shares priced close to embedded value Sungei Bagan could be a means of speculating on an attractive deal

 

At OCBC&rsquo s annual general meeting on Apr 17, chairman Andrew Lee left no doubt that the banking group has been unmoved by calls for it to distribute its stake in Great Eastern Holdings (GEH) to its shareholders.

 

&ldquo (We) are not blinking,&rdquo he said, after reiterating OCBC&rsquo s longstanding position that its insurance unit is a significant source of earnings, and provides the group with a unique competitive advantage in the wealth management field.

 

Lee also defended OCBC&rsquo s miserly offer price of S$25.60 per share for GEH last year, saying it was based on work done by its investment bankers. &ldquo We paid millions for the advice,&rdquo Lee noted.

 

There is no point in continuing to argue about it, though. The more important question is how the impasse between OCBC and GEH can be resolved, and how investors should position themselves.

 

Lee refused to delve into this question at OCBC&rsquo s AGM. &ldquo It&rsquo s price sensitive,&rdquo he noted. &ldquo Great Eastern may be suspended, but OCBC is alive and kicking on the SGX &ndash the price moves on news.&rdquo

 

Yet, OCBC&rsquo s unwillingness to blink on its plainly-stated objective of keeping GEH in its fold, and its seeming aversion to paying much more than S$25.60 per share for the remaining stake in the insurer, could offer some clues on how things will eventually be sorted out.

 

Alternative path to delisting

Before going any further, some background might be useful.

 

OCBC&rsquo s offer for GEH last year at S$25.60 per share did not satisfy the two key conditions for a voluntary delisting. GEH&rsquo s independent financial adviser did not find the deal to be &ldquo fair and reasonable&rdquo and the offeror did not obtain an acceptance rate of at least 75 per cent.

 

GEH has been suspended from trading since July last year, because less than 10 per cent of its shares were left in the hands of the public. OCBC currently has an interest in 443.7 million GEH shares, representing a 93.75 per cent stake in the insurer.

 

As a public-listed company, GEH is expected to comply with the minimum free float rule. It has until May 25 to come up with a plan, assuming no further extensions of time are granted. GEH said on Mar 28 that it had appointed Merrill Lynch (Singapore) &ndash known as BofA Securities &ndash as a financial adviser to help explore various options.

 

On the face of it, the simplest solution would be for OCBC to make another offer for GEH. Yet, it seems unlikely that OCBC is prepared to pay a high enough price to win over GEH&rsquo s remaining minority investors.

 

OCBC&rsquo s offer last year was priced at a 30 per cent discount to GEH&rsquo s embedded value as at end-2023 of S$36.59 per share and it achieved an acceptance rate of only 46 per cent. GEH&rsquo s embedded value at end-2024 stood at S$38.08 per share.

 

What other options are available? One alternative I keep hearing about is for GEH to delist via a selective capital reduction exercise.

 

Under such a deal, GEH would cancel the shares held by its minority shareholders in exchange for a cash payment. OCBC would end up owning 100 per cent of the insurer, without having to make another offer.

 

Some investors have pointed out to me that it would be GEH&rsquo s board, rather than OCBC&rsquo s board, that would be responsible for leading a capital-reduction exercise, and ensuring that the insurer&rsquo s minority shareholders are adequately compensated.

 

Among Singapore-listed companies that have recently gone private via this route is Best World International.

 

A possible sticking point is that many GEH minorities want their shares to be priced at close to embedded value. Purchasing the nearly 29.6 million GEH shares that OCBC does not already own at S$38.08 each would cost nearly S$1.13 billion.

 

At end-2024, GEH held total assets worth more than S$113.9 billion, and shareholders&rsquo equity of S$8.69 billion.

 

Speculating on a deal

How can investors speculate on the possibility of a selective capital-reduction exercise at GEH with its shares currently suspended?

 

One option is to look at shares of Kuala Lumpur-listed Sungei Bagan Rubber Company &ndash which owns plantations, real estate and a pile of GEH shares.

 

Last year, Sungei Bagan acquired most of the assets and liabilities of another Kuala Lumpur-listed company, called Kuchai Development, in exchange for new shares. Kuchai subsequently distributed the Sungei Bagan shares it received to its own shareholders.

 

Among the assets Sungei Bagan acquired from Kuchai under the deal were more than 3.03 million GEH shares. Sungei Bagan already held more than 1.73 million GEH shares before the transaction. GEH&rsquo s latest annual report listed Sungei Bagan as its second-largest shareholder, with a holding of nearly 4.77 million shares &ndash representing a 1.01 per cent stake.

 

Sungei Bagan&rsquo s usually thinly traded shares ran up in May last year, as OCBC unveiled its offer for GEH at S$25.60 per share. They closed last week at RM5.64 &ndash putting Sungei Bagan&rsquo s market capitalisation at RM524.1 million, or about S$157.4 million.

 

Based on OCBC&rsquo s offer price of S$25.60, the GEH shares held by Sungei Bagan would be worth nearly S$122 million &ndash or 77.5 per cent of the company&rsquo s entire market capitalisation.

 

If its GEH stake were to be valued at its embedded value of S$38.08 per share, Sungei Bagan&rsquo s stake in the insurer would be worth nearly S$181.5 million &ndash or 15.3 per cent more than its current market capitalisation.

 

Investors should tread carefully, though. If there is no resolution to GEH&rsquo s trading suspension soon, Sungei Bagan could turn into a value trap.