OCBC
- Original Post from BPWLC BLOG

Along with the other banks, OCBC has recently announced the FY 2018 results. The net profit improved 11% from S$4.05b to $4.49b. Apart from its subsidiary, Great Eastern’s disappointing results, I would say that OCBC did well for FY 2018. Along with the reasonably good results, OCBC is offering a dividend of 23 cents per share for H2 FY2018, representing a dividend payout of about 41% for the whole year. This is, however, lower than its peers like DBS and UOB. The dividend payout for DBS and UOB is 56% and 50% respectively. (Click here for the performance numbers.)


Over the years, OCBC appeared to have a greater propensity to pay out scrip dividend compare to the other two banks. This is the 12th time that the bank proposed scrip dividend since the global financial crisis in 2009 . To incentivise the acceptance of scrip dividend, OCBC is offering a 10% discount on the final weighted average price from 3 May to 6 May 2019 (inclusive).


The question to many investors is – what is the purpose of the bank distributing scrip dividend? And is scrip dividend good or bad for shareholders? To me, there is no absolute advantage or disadvantage in having scrip dividends. It depends on what the bank’s objective and what we wanted as a shareholder. The financial advantage of scrip dividend is not exactly apparent. After all, one can create a quasi-scrip dividend exercise by using the cash dividend to buy the bank’s shares in the open market. The brokerage and administrative fees are comparative small in terms of costs as they can be easily offset if we purchase the bank stock at prices lower than the stock’s conversion price. That said, it is still good to discuss about the characteristics of scrip dividend from the bank’s perspective as well as from shareholder’s perspective.


For the bank



  1. Generally, banks (or for that matter any public-listed companies) do not like to have too much volatility in their stock prices. Essentially, they want people with long-term views. By distributing dividends in the form of scrip, it helps, to a certain extent, make shareholders hold onto their stocks longer. For one, by providing scrip dividends that end up in odd-lots in the hands of shareholders. Thus, this makes it more difficult for holders to offload their stocks easily.

  2. By providing a discount to the on-going share price, the bank is, in effect, encouraging shareholders to take the scrip dividend instead of cash. This helps the bank to preserve cash which can be very useful during times of need. Just base on the back-of-envelope calculation, with the dividend of 23 cents per share, it would cost the bank $979.1 million in cash for just this dividend distribution. Even though OCBC is able to meet the current Common Equity Tier 1 (CET-1) requirement, it still went ahead to offer scrip dividends. This may mean that the bank is forecasting uncertain times or it may be preserving a bigger war-chest of cash for some capital investment ahead. While attempting to preserve cash capital, it is, in effect, creating a larger share base. This will have a dilutive effect. It may work against shareholders especially when times turn for the worse. Fortunately, OCBC has been buying up their own shares in the open-market. The bank had been given the mandate in the last shareholders’ annual general meeting to buy up to 212 million (or 5% of the issued shares) in the open market. Certainly, as shareholders, we would be more comfortable with companies that are able to buy back their own shares compare those that are unable to.

  3. While the bank is dabbling in the stock market buying 200,000 shares each time, it is not possible to know whether the bank is gaining or losing out in this whole exercise. After all, their job is not to make a profit by buying shares in the open market. Based on the 5% buy-back mandate from the shareholders, the bank can buy up to 212 million shares. Given that OCBC makes a purchase of 200,000 shares each time, it would take more than 100 trading days to fulfill the whole order, and not including those purchasing shares under the employees’ option scheme. This translates to about 40% of the total number of trading days in a year. In some days, it may buy high and in some days it may buy low. Generally, the stock price during the conversion days tend to be very high as they are very near to the ex-dividend date. So, it means that the conversion stock price tends to be on the high side. So, even if the bank gives a 10% discount over the conversion price, there still may a chance that the bank did not lose out buying from the open market as its average buying price can be much lower than the conversion price. As of today, the conversion price is yet to be determined. It will be the weighted average of the trading share price from 3 May 2019 to 6 May 2019 (Inclusive). Note that a cash dividend is a certainty for the bank. For scrip dividend, this is not certain as to how many shares will be ultimately distributed. With the sweeteners (discounts) for shareholders thrown in, it is yet to be known whether the bank gains or loses out compare to cash dividend. However, one thing if for sure. Less cash will be dispensed, but, at the expense of a larger share base.


Shareholders



  • As shareholders, scrip dividend can be an alternative to cash dividends if the shareholder does not need to the money at that time. The problem of going for scrip dividends it that we end up with odd lots. This can be a bit troublesome if we want to sell them in the future. Although lot size has been reduced from 1000 shares to 100 shares, stockholders are often forced to sell the mother lots in order to amalgamate the sales due to the minimum brokerage charge.

  • As one may point out, there is no need to pay for brokerages and the other administrative fees when we accept scrip dividends in lieu of cash dividends. However, this often not a major issue. As it is, one can create a quasi-scrip dividend by buying the stock from the open market upon the receipt of dividends. The brokerage and all the related fees are relatively small, and can be easily offset if one is able to purchase at a lower trading price than the conversion price calculated by the bank.

  • One point about scrip dividend is that we are able to practice what is known as power of compounding. Say we have 10,000 shares and the dividend rate is $0.23. Assuming a conversion rate of $11.50, we would be entitled 200 shares. The next time when OCBC declares scrip dividends, our share base would be based on 10,200 shares instead of 10,000 shares. As our stock accumulates, we are in effect, practicing the power of compounding. From that point of view, it is true. In essence, I am assuming that the future dividend distribution continues to be the same or higher. In investments, many unexpected things can happen. It is possible that the bank falls onto bad times and have to reduce the dividend rate. A decrease in the dividend rate can have a significant effect on the power of compounding.

  • Certainly, a discount in the conversion price of the scrip dividend is a plus factor to encourage shareholders to take up the scrip dividend. It provides an additional margin of safety. This stands as a cushion in a falling share price situation when the global economy or the business situation for the company turns for the worse. It serves as a good alternative to getting cash dividends.


At the end of the day, there is no absolute advantage or disadvantage to either the bank or to the shareholders. It is more like a question of choice. As mentioned earlier, OCBC has the lowest payout ratio (41% compared to DBS’s 55% and UOB’s 50%.). Perhaps, it has been under pressure to bring up its dividend payout as well. Instead of increasing the dividend rate, it is probably doing so by increasing the share base so that the total payment ratio reaches the mid-40%.


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.


The post OCBC appeared first on BPWLC BLOG.


$OCBC Bank(O39.SI)

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BrennenPak

OCBC reported the conversion rate to be $10.55 per new shares if one were to take up the scrip dividend. On Friday, 3 May 2019, the share was trading above $12. If that were to continue to Monday, 6 May, then the conversion price would be about $11 after the 10% discount. Of course the final conversion is also dependent on the volume at each price being transacted (weighted-average share price). Thanks to Donald Trump's message to increase the tariff of some China goods to 25% over the weekend, the STI plunged by more than 100 points on Monday, 6 May. Along with it OCBC was trading alightly above $11.50 on Monday (not exactly sure as I do not track the share price the whole day). To a certain extent, shareholders get more shares for scrip dividends. Based on the past one year record, the price at this level was touched momentarily in Oct 2018. [This message is not advertising for OCBC. Just a quick summary of what had happened.]


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OCBC is still growing
- Original Post from BPWLC BLOG

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.


I want to have a free
ebook on “Ten golden rules of stock investment” NOW!


More news on
www.bpwlc.com.sg.


The post OCBC is still growing appeared first on BPWLC BLOG.


$OCBC Bank(O39.SI)

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The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. $OCBC Bank(O39) seemed to have it worst, while $UOB(U11) did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

For more, see http://blog.bpwlc.com.sg/the-local-banks-d...

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If we missed the best stock upsides
- Original Post from BPWLC BLOG

Today marks a little more than one month after Donald Trump won the US election. When he first won the election, the market at first reacted negatively, followed by a strong rally and then tapered off in the last two days. The banking stocks, in particular, were the biggest beneficiaries of this rally. $DBS(D05) has advanced from about $15.20 to a high of $18.32 and then settled at $17.83, an increase of $2.63 or about 17.3%. Similarly Overseas Chinese Banking Corporation ($OCBC Bank(O39) ) had also advanced $0.73 or 8.6% from $8.53 to $9.26. United Overseas Bank ($UOB(U11) ) also showed a significant increase of $2.31 or about 12.4% from $18.59 to $20.90. Of course, if one holds the bank stocks, the return for this month alone is extremely significant.
Despite the rally, many people still asked the same question just a few days ago– $DBS(D05) bank, can still buy now? Does it mean that these people missed boarding a stationary wagon and is now chasing a moving one? Actually, if we look at the bank stocks, in particular DBS, it has been parking below $16 for many months, right from the beginning of the year or even before. Why do we need to wait for it to move up to chase it? Why can’t we buy it at our own pace and wait for the rising tide to raise our boat?  It appeared logical right now in hindsight, but seemed to be an irrational decision when the share price was oscillating between $15 and $16 per share for a long time. Very often, when a stock or the market rallies, the onset is often the sharpest and this is when the smaller players start to take note. By the time when one start to confirm, double confirm, triple confirm, a significant part of the upside has already been priced in the stock. So by the time retail investors start to buy into the market, perhaps there is only the last 20-30% upside. We always come across a statement to the effect that if we missed the best 10 trading days, our stock performance would just appear ordinary. Worse still, it could even be negative performance despite that the STI moved up significantly. To me, stock market has a place for both big and small players. Big players cannot play like a small player and a small player cannot afford to play like a big player. Big players buy into the market to cause the market rally, but the advantage of small players is to be able to buy into stocks without causing big ripples in the stock market. That’s where we should play to our advantage. Remember that our wealth is not just measured by the amount of money we have in the bank. Our wealth is measure by the sum of our cash, stocks, properties and whatever assets that we possess.  So, there is no need to be in cash all the time. It is important to engage the stock market all the time than to wake up only when the rally has already been well underway.
Happy investing!
For more, join me at investing note by clicking here!     
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. 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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If this stock market turmoil ends up in a liquidity crunch, do you know what the banks will do?
- Original Post from BPWLC BLOG

During the times when there is liquidity crunch, such as now when there is an impending interest rate hike in US or when there is a  stock market rout in the region, what is the most important thing for the banks? Yes, CASH at hand! When there is an extreme liquidity crunch, the banks will tend to play it safe. Whether or not they are going to use it, raising cash is the most important thing to do during such times.
Historically, there were many precedences. During 1998, when there was the Asian Financial Crisis, $DBS(D05) bought POSB. It was the people’s bank with a huge amount of deposits. The main lending activities of POSB at that time was mainly in secured lending such as housing loans and the deposits at that time was huge.
In the recent global financial crisis in 2008, DBS raised S$4.2 billion through rights issue. Seven hundred and sixty (760) million rights were offered at $5.42c, a hefty discount of 45% to the last day trading price of $9.85. Each right was offered at 1:2 basis, meaning 1 right for every 2 shares owned.
In parallel $OCBC Bank(O39)  went into offering prefence shares at $100 per share in August 2008. To sweeten the deal, the dividend rate was offered at an 5.1%, a rate not seen around those years. OCBC raised $1 billion from the exercise. Following that move, $UOB(U11) also followed suit with the same offering but at a slightly lower rate of 5.05%. UOB also raised about $1billion from the exercise.
In such times, when people are fearful and cashing out of the stock market, this appeared to be the best time for the banks to raise cash. After all, with bank interest rate at a low point and with the stock market turmoil, many investors will have to park their encashed money somwehere where there are better returns. With the bank’s brand name and with the sufficiently sweet deal, it is possible for the banks to raise funds with relative ease.
What do the banks do with these money? Well, during market turmoils is one of the best opportnities for the banks. It is a question of survival of the fittest. Many so-called ‘fantastic companies’ will not be trading at historically fire-sale prices unless during these times. Remember that Astra, was one of the crown-jewel of the Indonesia companies before the 1998 Asian Financial Crisis. It was forced to sell its shares to Cycle and Carriage (C&C) before C&C was taken over by the Jardine group. If shares of Astra had not been sold to C&C, Astra would not have been in existence or could have been disintegrated into smaller companies. Who knows Danamon Bank in Indonesia may be up for sale once again with better selling conditions. The last time, when the deal fell through was in 2013, when the Indonesian regulators allowed a maximum cap of 40%. DBS, on the other hand, was looking into acquiring 67.37% (for a price tag of $542.4m) which will ultimately trigger it to make a take-over offer of the bank.
Shareholders, in particular those who hold blue-chips, should maintain your liquidity now. You may be put in a situation to acquire rights or preference shares at a steep discount. Perhaps if you look at it n a long-term basis, it may not a bad deal if you are looking to be rewarded with 500 DBS shares or 1000 OCBC shares as dividend in every dividend distribution exercise.
(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

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Banks may be cheap now, but…
- Original Post from BPWLC BLOG

Cash is king. Yes, during financial turmoil like this when stock markets all over the world are sinking, having cash is the key. According to $STI(^STI) The Straits Times on 20 January 2016, just last year alone, about US$735 billion left emerging market. China accounted for $676 billion which formed the bulk of the outflow. Similarly, the fund inflow last year was about US$231 billion against US$1.2 billion per year from 2010 to 2014.
On the corporate front, banks are natural victims during times of liquidity crunch too. Most bank share prices have sunk more than 30% from their recent high when the ST index hit 3500. Right now, banks are trading near or below their book value (BV). Exactly, five months ago, I had written in my blog that there was always a possibility that banks might start to raise funds through rights issue if the turmoil persists. So far, none of the banks have raised alarm, but still it is possible if banks deem it fit to do so. After all, there were past precedence of fund raising activities during financial crises. For example, $DBS(D05) raised S$4.2b in end 2008 through 1-2 rights issue. Similarly, $OCBC Bank(O39) and $UOB(U11) raised $1 billion each through preference shares issue. In a similar way, during Asian financial crisis in 1998, DBS acquired the POSB. Looking ahead, it is still a possibility especially during such times when other banks or companies may fall into bad times. Such huge fund raising activities can come in handy for future acquisitions.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. 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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