Chong Hink Bank AT1 capital issue raises possibility of EPS dilution

Bonds will boost Tier-1 and total CAR.

It has been reported that CHB will issue USD300m of convertible perpetual bonds with a coupon rate of 6.5-6.625%.

According to a research note from Maybank Kim Eng, these bonds will be regarded as “Additional Tier-1 (AT1) capital”. The report estimated that this will help boost its Tier-1 CAR and total CAR by 3.7ppts.

Assuming CHB will use the proceeds to invest in securities with gross return of 5%, Maybank Kim Eng lowers it NIM forecasts for CHB from 1.51% to 1.42-1.44% for 2015-16. As such, it also estimates there will be EPS dilution of 4.2-4.6% during 2015-16.

Here's more from Maybank Kim Eng:

A need to replenish equity capital in 2015. Apart from EPS dilution, the issue of AT1 capital will increase CHB’s risk-weighted assets by about HKD1.1b during 2014-16 if we assume the new investment in securities carries a risk-weight of 50%.

Consequently, we lower our CET1 CAR forecast from 11% to 10.7-10.8% for 2015-16. This should be lower than the minimum regulatory requirement of 11%, implying potential equity capital replenishment in 2015.

We still expect potential privatization in 1H15. If the parent company, Yue Xiu Financial Holdings (YXFH) privatizes CHB, it will have greater flexibility to inject capital into CHB without any concerns of diluting its shareholding.

The recent acquisition of Wing Hang Bank (WHB) by OCBC was based on 2.05x P/BV. Our 2016 ROE forecast for CHB is 10.2%, which is lower than that of WHB (~12%).

Based on this, we estimate the fair acquisition P/BV for 100% of CHB should be about 1.8x (or HKD14.4b based on Jun 2014 BV of HKD18.36).

YXFH spent a total of HKD11.6b to acquire a 75% stake in CHB in Feb 2014. Hence, the fair value for the remaining 25% should be HKD2.8b or HKD25.75 per share.