• Digital transformation is a step in the right direction and OCBC is playing it safe by sticking with a tried and tested approach.
• OCBC targets to achieve a 40% cost- to- income ratio (CIR) by 2023 once cost efficiencies from its transformation kick in. 1H18 CIR stood at 43%.
• Maintain ADD with a Target Price of S$14.00 based on GGM (LTG:3%, ROE:11.8%).
• Short-term catalyst includes higher NIMS from loan repricing.

Technology as a Necessity Rather Than a Competitive Advantage

We attended the OCBC Investor Day, which showcased the digital transformation efforts of the bank - from introducing its digital initiatives to giving live demos of its applications. Digitalisation is not new and the concerted push towards the use of AI and analytics is a step in the right direction for the bank.

We think the demos showcased were not ground-breaking but necessary for OCBC to operate competitively; the form and function of demos were very similar to existing players but necessary to ensure customers remain within the OCBC ecosystem.

Digitalisation to Result in 40% Cost-to-income Ratio (CIR) by 2023

• Cost avoidance and efficiencies are expected to arise as a result of technology spending which represented 11% of costs in FY17 (8% in 2013). Management expects CIR to gradually trend towards 40% on a steady state (four to five years from now). As of 1H18 CIR stood at 43%.
• The target of 40% will be gradually achieved via investments in technology, reduction in the number of physical branches, as well as minimising the need for tellers (read: smaller branches). 
• Note that DBS Group (SGX:D05) aspired to have its CIR reduce to less than 40%.

Hurdles and Gestation Period Stand in the Way of Success

We think OCBC currently still relies on third-party technical capabilities to execute any innovations. Most of the demos were carried out by 3rd party developers. However, OCBC is on the right track with its 3-year S$20m initiative, the OCBC Future Smart programme, to develop the digital skills of its 29,000 employees.

Management also mentioned that partnerships with fintech firms also expose employees to new capabilities and the digital culture of start-ups which take time to inculcate.

For adoption of technology, especially in payments, end-users face too many similar alternatives which dilute the stickiness of each platform. Another challenge faced is getting customer consent to use personal data collected by the bank.

CEO Samuel also mentioned that physical branches are here to stay as customer behaviour has not changed to the extent that make branches obsolete. A number of old-school clients have been resistant to the digitalisation efforts by the bank.

Despite the increased hacking attempts, management is comfortable with its current cyber security infrastructure, comprising 6% of technology costs.

Source: CGS-CIMB Research - 24 Sep 2018