OCBC - Successful Integration of Wing Hang; Opportunities From GBA Beckon

Date: 19/08/2019

Source  :  UOB KayHian
Stock  :  OCBC Bank       Price Target  :  14.48      |      Price Call  :  BUY
        Last Price  :  8.74      |      Upside/Downside  :  +5.74 (65.68%)

  • The acquisition of Wing Hang Bank has provided OCBC with a platform to grow its Wholesale Banking, Treasury and Private Banking businesses. The next phase of growth involves capturing business opportunities in the Greater Bay Area (GBA) and cross-border flows between China and ASEAN countries.
  • Having successfully integrated OCBC Wing Hang, OCBC is poised for inorganic growth within the core markets of Singapore, Malaysia, Indonesia and Greater China.
  • Maintain BUY. Target price: S$14.48.

What’s New

  • We attended OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s Corporate Day held in Hong Kong last week:

Growing importance of Greater China.

  • Prior to the acquisition of Wing Hang Bank (WHB), Greater China contributed S$208m or 6% of group PBT in 2013. Since then, contribution from Greater China has grown to S$1,037m or 19% of group PBT, representing 5-year CAGR of 38%. On an organic basis, we estimate that OCBC Wing Hang (Consumer and SME) would have grown at 5-year CAGR of 4%, compared with 21% for its Hong Kong branch (Wholesale Banking) and Bank of Singapore (Private Banking).
  • From a business franchise perspective, including cross-border flows booked in Singapore, operating profit from Greater China would have expanded from S$476m to S$1,628m, representing a 5-year CAGR of 28%.

Corporate Banking: growth driven by PRD and new industries.

  • OCBC has realised growth from new markets:
    1. revenue related to the Pearl River Delta (PRD) grew 126% y-o-y in 1H19, and
    2. OCBC has secured new businesses from new industries, such as Healthcare, Education and Logistics, worth HK$1.7b in 2018.
    3. OCBC has launched cash management system Velocity to grow its operating accounts in 2019.

Benefitting from growing affluence.

  • AUM from Greater China expanded by 4x from US$9b to US$36b, representing 5-year CAGR of 32% (OCBC group: 1.8x or 5-year CAGR of 12%). Greater China accounted for 35% of group AUM in 2018. AUM per client has improved by 2.5x despite a doubling of headcount for relationship managers (RMs).
  • Bank of Singapore (BOS) plans to address ultra-high net worth clients’ needs for Wealth Preservation and Succession through its capabilities in wealth planning and structuring.

New revenue stream from treasury activities.

  • OCBC Wing Hang’s total treasury sales revenue has grown 13x since 2014, driven by a 27x increase in hedging solutions.
  • OCBC established its North Asia Treasury Hub in Hong Kong in 2017. Going forward, OCBC Wing Hang plans to launch new products, such as equity-linked notes and interest rate hedging solutions, and digitise its treasury products on an e-platform.

Shore up funding in HK$ and US$.

  • Hong Kong has abundant supply of US dollar due to the Hong Kong dollar’s peg to the US dollar. Deposits denominated in US dollar expanded from 23% to 31% of total funding base over the past five years. Likewise, deposits denominated in Hong Kong dollar has expanded from 2% to 10% of total funding base.

Stock Impact

Opportunities from GBA beckons.

  • Greater Bay Area (GBA) comprises Guangdong province (9 key cities: Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen, and Zhaoqing), Hong Kong and Macau, which forms a formidable hub. GBA accounted for 5% of China’s population and 12% of China’s GDP. OCBC is currently the 4th largest foreign bank in GBA with 89 branches (Hong Kong: 66 branches, Shenzhen: 5 branches and Guangzhou: 3 branches).
  • GBA contributed PBT of S$605m or 37% of PBT from Greater China. Management target to double PBT from GBA to S$1b in 2023, which represents a 5-year CAGR of 11%. This is supported by loan growth of 12% per annum to S$80b by 2023. Overall, management expects Greater China to account for 20-25% of group PBT by 2023 (2018: 19%).

Smooth integration of OCBC Wing Hang.

  • Management has implemented a 5-year strategic plan conducted over three phases:
    • Phase I: Preserve (2014-15) – Retain customers and preserve revenue streams.
    • Phase II: Enhance (2015-16) – Deepen customer relationships, improve efficiency and expand product suite.
    • Phase III: Grow (2017 onwards) – Grow new franchises and revenue streams. Realise potential of a regional bank through Greater Bay Area (GBA) strategy.
  • PBT has accelerated to a 3-year CAGR of 17.4% during Phase III in 2016-2018. Asset quality remains stable with NPL ratio for OCBC Wing Hang at 0.58% (OCBC group: 1.48%). Management plans to invest HK$400m over the next three years to enhance its digital offerings.
  • OCBC Wing Hang started preparation of internal rating-based approach (IRBA) to calculate risk-weighted assets (RWA) in 2016. Management expects IRBA to be approved and fully implemented in 2020.

Earnings Revision / Risk

  • We maintain our existing earnings forecast.

Valuation / Recommendation

  • Maintain BUY. Our target price of S$14.48 is based on 1.40x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.00% (Beta: 1.1x) and Growth: 1.0%).

Source: UOB Kay Hian Research - 19 Aug 2019

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