September 5, 2019

Speculation has surfaced that Oversea-Chinese Banking Corporation (OCBC) is mulling an acquisition of 89.2% of Bank Permata from Standard Chartered Bank (SCB) and Astra International. Both shareholders have equal stake of 44.6% in Bank Permata.

SCB has embarked on a three-year strategic plan to double ROE to above 10% by 2021. It has identified and would restructure its operations in four non-performing markets, namely India, Indonesia, South Korea and the UAE. SCB has classified its 45% stake in Bank Permata as non-core. CEO Bill Winters has said that SCB is actively working on finding a solution for Bank Permata since Oct 18. Divestment of Bank Permata would generate capital to support share buyback and higher dividends.

In 2016, Bank Permata racked up losses of Rp6,483b due to allowance for impairment losses of Rp12.2t. NPL ratio deteriorated from 2.7% in end-15 to 8.8% in end-16 (NPL balance increased more than 3-fold due to exposures to manufacturing, wholesale & retail, mining, agriculture and construction sectors). Indonesia experienced slower growth at 5.0%, buffeted by weak commodity prices and rupiah volatility. Corporate loans for working capital and investments shrank 26% and 35% respectively. The bank liquidated part of the NPL portfolio and wrote-off Rp4,455b of NPLs. The bank had to be recapitalised by raising Rp5.5t through a 249-for-283 rights issue in Jun 16.

Bank Permata does not have a multi-finance company. It relies on collaboration with Astra’s multi-finance companies, such as PT Astra Sedaya Finance (ASF), PT Federal International Finance (FIF) and PT Toyota Astra Financial Services (TAF), to provide financing for automobiles and other durable goods. Outstanding balance for indirect consumer finance was Rp10.7t as of Dec 18, which accounted for 10.8% of total loans. It is uncertain if Astra would continue the collaboration with Bank Permata when it is no longer a shareholder.

Bank Permata is the 11th largest bank in Indonesia with 323 branches across 62 cities and total assets of Rpt153.9t (S$15.1b) and RWA of Rp95.8t (S$9.4b). Acquisition of Bank Permata would increase OCBC’s total assets and RWA in Indonesia by 3.9% and 4.7% respectively. The potential acquisition would propel OCBC to be the fifth-largest bank in Indonesia.

The stock trades at Rp1,005 with market cap of S$2.8b. Its P/B is only 1.21x (OCBC NISP: 0.75x) due to low ROE of 5.9% (OCBC NISP: 11.6%) and NIM of 3.5% (OCBC NISP: 4.1%).

CBC has various options for inorganic growth and there are various potential bidders for Bank Permata:

  1. Various options for inorganic expansion. OCBC could invest to further expand in the Greater Bay Area (GBA). Management targets to double PBT from GBA to S$1b by 2023, which represents a 5-year CAGR of 11%. OCBC could also increase its stake in Bank of Ningbo (BON) beyond its current 20% if China liberalises its banking sector to allow for greater foreign participation.
  2. Various suitors conducting due diligence. According to press reports, Bank Mandiri was exploring the feasibility to acquire Bank Permata as early as Mar 19. In the past, Bank Panin, CIMB, Maybank and UOB have also considered bidding for Bank Permata.

Maintain BUY. Our target price of S$14.48 is based on 1.40x 2019F P/B, derived from the Gordon Growth Mode. – UOB KayHian

Oversea-Chinese Banking Corporation closed at: S$10.77