"We think a merger is timely under the International Accounting Standards (IAS), Banco de Oro estimates a capital adequacy ratio (CAR) of 10- to 11 percent post merger which would eliminate the need for capital raising," UBS said.
UBS’ positive attitude towards a merger after the share-swap takes into consideration EPCI’s goodwill and repossessed properties worth an estimated P15 billion.
In contrast, Banco de Oro enjoys an excess capital with a CAR level of 17 percent as of end September last year. The minimum level acceptable by regulators is 10 percent.
UBS said if the two banks were merged under the 2005 return on equity (ROE), a dilution of its ROE will occur from an estimated 13.5 percent to 11.4 percent.
"But we estimate an ROE of 14.2 percent if we incorporate loan and deposit pricing power as Banco de Oro builds its franchise and becomes bigger. We think a merged entity could place BDO in a stronger ROE growth path in the longer term," it added.
UBS’ price target for Banco de Oro is P46 per share assuming only organic growth.
Using the 1.6 BDO shares for every one EPCI share, UBS computed a P73.60 per share value for EPCI which exceeds its fair value target of P67 per share. "We think EPCI shareholders should find the offer attractive," UBS said.
At yesterday’s trading, Banco de Oro shares were traded at P36 while Equitable PCI Bank shares closed at P63.
"We believe Banco de Oro’s ability to build a majority stake in EPCI has been hampered by delays in the Supreme Court’s decision over the conduct of its acquisition of the EPCI shares held by the Social Security System (SSS). If majority vote of shareholders accept BDO’s offer, SSS would have the right to participate in the share-swap," the UBS study, dated Jan. 6, 2006, said.
The Europe-based investment firm classified Banco de Oro as a mid-sized bank that is still in the process of building scale and pricing power over its retail depositors and consumer and corporate lenders.
Loan yields is expected to improve as Banco de Oro increases its consumer lending contribution taking into consideration the wide market reach of Equitable PCI Bank.