OCBC: Bolt-On Acquisition of Small Indonesian Bank Shouldn’t Much Affect Year-End Dividend

We maintain our fair value estimate of SGD 16 for narrow-moat Oversea-Chinese Banking, or OCBC, after news that it was the top bidder for Commonwealth Bank of Australia’s Indonesian unit PT Bank Commonwealth, or PTBC. The upfront cash payment is AUD 220 million, less than PTBC’s net assets as of June 2023 of around AUD 390 million. We do not think OCBC is overpaying even if the complete terms that allowed its bid to prevail over other interested parties end up costing more than the upfront payment. That said, PTBC, with an estimated market share of loans in Indonesia of less than 0.2%, is not a strongly competitive bank, with a return on equity of around negative 11% in 2022. We think the key for OCBC will be integrating PTBC smoothly into its Indonesian unit Bank OCBC NISP, so that PTBC’s contribution to NISP’s future earnings is larger than the acquisition cost and any potential further losses at PTBC.