SINGAPORE (Aug 29): Oversea-Chinese Banking Corp has gained significant franchise value across the Greater China region, having successfully integrated the operations of Wing Hang Bank after acquiring it in 2014.
In 2013, OCBC’s Greater China franchise’s AUM was US$9 billion. By 2018, this had surged fourfold to US$36 billion. The 2018 AUM per client is also 2.5 times that in 2013, meaning OCBC has been able to attract new clients with higher net worth.
Seen from another perspective, Greater China, made up of China, Hong Kong, Macau, and Taiwan, had accounted for 6% of OCBC's PBT in FY13 but by FY18, this had risen to 19% share. OCBC's FY18 PBT also surged to $1.04 billion which is five times the value in FY13.
In the next phase of growth, OCBC is seeking inorganic growth in Greater China as well as business opportunities in GBA among other plans. Comprising Hong Kong, Macau and Guangdong province with its nine key cities including Guangzhou, Shenzhen and Zhuhai, GBA accounts for 5% of China’s population and 12% of China’s GDP.
In FY18, GBA contributed PBT of $605 million or 37% of PBT from Greater China. OCBC is currently the fourth largest foreign bank in GBA with 89 branches. It has 66 branches in Hong Kong; five branches in Shenzhen and three in Guangzhou.
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Now, OCBC’s top management plans to double PBT from GBA to $1 billion in 2023, which translates into a five-year CAGR of 11%. This will be supported by loan growth of 12% per annum to $80 billion by 2023. Overall, management expects Greater China to account for 20-25% of group PBT by 2023 from 19% in 2018.
However, despite the sound strategies and record net profits, stock prices for the three local banks fell sharply in August. However strong the fundamentals, market sentiment has taken a turn for the worse. Short-term investors and traders are now hostage to Trump’s mood swings, which are translating into market volatility.
At a results briefing on Aug 2, OCBC CEO Samuel Tsien was asked to comment on the impact of the trade war on the supply chain. “The whole supply chain needs to move, not just the anchor company, and that action is being mobilised now. The migration will not be as significant as people believe because you need software skills and adaptability of labour. China is very good at changing models,” said Tsien.
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Tsien also pointed out that Singapore is seen as a safe haven for trade, wealth management, insurance and reinsurance, legal and arbitration. “Singapore is a hub economy, and most of the activities that banks do may not be directly related to Singapore, but are related to its hub status and allow banks to deliver results that are higher than the domestic Singapore economy,” he added.
So what do analysts make of OCBC’s growth plans in GBA and Greater China?
In an Aug 19 report, UOB Kay Hian analyst Jonathan Koh says OCBC’s recent growth was driven by new markets and new businesses and that investors can bank on that. In the corporate banking segment for instance, revenue related to the Pearl River Delta (PRD) grew 126% y-o-y in 1H19 and the bank has secured new businesses from new industries, such as Healthcare, Education and Logistics, worth HK$1.7 billion ($301 million) in 2018.
In addition, OCBC Wing Hang’s total treasury sales revenue has grown 13 times since 2014. After establishing its North Asia Treasury Hub in Hong Kong in 2017, OCBC Wing Hang plans to launch new products like equity-linked notes and interest rate hedging solutions, as well as digitise its treasury products on an e-platform.
UOB is maintaining OCBC at “buy” with a target price of $14.48 based on 1.40 times FY19F book.
However, RHB Research is keeping OCBC at “neutral” with a target price of $11.50, based on 1.07 times FY20F book. In a Aug 20 report, analyst Leng Seng Choon says while he is optimistic on further GBA growth, net interest margin contraction could lower overall earnings growth.
“We lower our long-term ROE assumption, given increasing global economic uncertainties,” says Leng, adding that believe OCBC’s share price could be volatile in the short term, given management has stated it is eyeing inorganic expansion opportunities.
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DBS Group Research is also maintaining OCBC on “hold” with a target price of $11.50 or 1.1 times FY20F book value as it believes there are limited catalysts for the stock currently.
In an Aug 16 report, analyst Lim Rui Wen says while any market opportunities across OCBC’s four key geographies -- Singapore, Malaysia, Indonesia and Greater China -- bodes well for the bank’s longer-term regionalisation strategy, the analyst is also cautious on acquisition uncertainties should they materialise. For instance, Bloomberg reported that OCBC is looking to acquire Bank Permata in Indonesia.
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“We are of the view that OCBC’s dividend policy, concerns over its non-performing assets coverage ratio (lowest amongst peers), as well as execution of any near-term market opportunities could continue to weigh on its near-term share price performance,” says Lim, who is also cautious that market volatility will continue to weigh on non-interest income.
Meanwhile, analyst Tin Min Ying of Phillip Capital says OCBC’s robust CET1 of 14.4% will provide shelter the bank from trade war uncertainties and slowing global growth. In an Aug 5 report, Tin says surplus capital will also provide opportunity for inorganic growth while heavier reliance on interest income and recurrent fees should provide stability and predictability to revenue and offset some of the impact from interest rate cuts.
Phillip is maintaining its "accumulate" at a lower target price of $12.50 based on 1.3 times current book.
As at 1.30pm. shares in OCBC are up 2 cents at $10.53.
