OCBC share price encountered “earthquake”

From a high of $14 in May, OCBC share price suffered a major “earthquake” and corrected 25% to reach a dismal level of $11.10 on 6 September. The plunge in OCBC share price also led to the dividend yield to reach the alluring level of 3.51%. Incidentally, OCBC issued a SGD1 billion perpetual securities with coupon rate of 4% in August. In the past, OCBC had also issued preference shares as well.

OCBC perpetual securities was issued at a time when investors were hungry for yield in a highly volatile environment. Being ranked senior than ordinary shares, perpetual securities are usually considered to be a safer investment product as compared to the shares of the same company. But it is interesting to note that the coupon rate of OCBC perpetual securities is 4%, slightly higher than the dividend yield of 3.51%. If OCBC share price drops further, the dividend yield will increase further.

As a bank stock, OCBC share price is obviously very volatile because banks are the bellwether of the economy. Thus, like DBS and UOB, OCBC share price is very sensitive to the changes to geopolitical and global financial health. In this regard, it may not be appropriate to view OCBC stock as a dividend counter. Also, using dividend metric as a valuation tool for OCBC shares may not be sound.

OCBC perpetual securities

In the investment world, I know it is important to compare apple to apple. Fundamentally, it may be flawed to compare the dividend yield of a stock to the coupon of perpetual securities issued for the same issuer. Both are different asset classes that come with different risk-return profiles. But if given a choice, I will still prefer to invest in OCBC shares, which is more liquid. Furthermore, besides receiving dividends, shareholders of OCBC can also stand to gain from the price appreciation in share price. As a matter of fact, OCBC share price had been on a roll since 2016, rising from $8.00 to the current $11.10 level, creating much wealth for shareholders.

The thing about perpetual securities is that this instrument gives the issuer the right, but not the obligation, to redeem the perps on the scheduled call dates. This effectively means you might not get your principal investment monies back. Furthermore, the distributions may be cancelled at the sole discretion of the issuer. This is currently the case for both Hyflux and Noble Group.

Of course, it is absolutely disgraceful to compare OCBC perps to those issued by Hyflux and Noble Group. Nevertheless, I am just trying to illustrate the catch of such high yield financial product. Basically for OCBC perps, the possibility of not redeeming on the call date (24 August 2023) should be remotely low because OCBC is widely regarded as one of the strongest banks in the world. I cannot imagine the CEO would default on the distributions or deferred the call of the bonds. In doing so, it would definitely spark off a crisis of confidence for the banking sector.

The demand for perpetual securities issued by local banks is very robust. Within a month of OCBC perpetual securities, DBS also announced perpetual $1 billion NC7 AT1 issue at 3.98per cent.

OCBC share price on ice and fire mode

The recent pull-back of OCBC share price is considered healthy, so investors should not panic. In fact, 2QFY2018 results had been pretty strong. OCBC reported net profit after tax of $1.21 billion for the second quarter, climbing 16% from S$1.04 billion a year ago, and 9% from $1.11 billion in the previous quarter.

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