• OCBC (SGX:O39) benefitted significantly from enhancement in franchise value in acquiring Wing Hang Bank.
• Targets to achieve S$1bn profit before tax from Greater China by 2023 (2018: S$0.6bn).
• Other market opportunities may bode well for longer term regionalisation strategy; could throw up uncertainties in near term.
• Maintain HOLD, Target Price S$11.50.

Regionalisation Efforts Continue

• Post OCBC’s acquisition of Wing Hang Bank in 2014, OCBC has benefitted significantly from enhancing franchise value through the merger across Greater China as it continues to be management’s focus as the largest market outside Singapore. Management has maintained the need for strong capital levels amid volatile markets and for market opportunities (for instance, acquisitions).
• While we believe that any market opportunities across OCBC’s four key geographies and three core business pillars may bode well for the bank’s longer-term regionalisation strategy, we are also cautious on acquisition uncertainties should it materialise.
• 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.
• We maintain our HOLD call as we believe there are limited catalysts for the stock currently.

Where We Differ

• We remain cautious that market volatility will continue to weigh on non-interest income.

Potential Catalysts

• Higher dividends. OCBC currently trades at 1.1x FY20F P/BV, near 1SD below its average 10-year forward P/BV multiple. A higher dividend payout ratio for OCBC, closer to its peers’ 50%, could be a re-rating catalyst.

Takeaways From OCBC Analyst Day

Acquisition of Wing Hang Bank created franchise value across Greater China.

• Since its US$5bn acquisition of Wing Hang Bank in 2014, OCBC has been able to execute various strategic initiatives to grow the Greater China business.
• Subsequently, OCBC was among the first Singapore banks to announce its Greater Bay Area strategy in 2017, having identified the Pearl Delta Region, Hong Kong, Macau as key areas where it targets to strengthen its core banking business by capturing trade, capital and wealth flows in/out of the Greater Bay Area. In 2018, S$600m franchise value was created (difference between OCBC Greater China legal entity booking (2018: S$1bn) versus internal management reports which includes Greater China earnings booked outside of China [2018: S$1.6bn]).

Deepening connectivity between OCBC Wing Hang, OCBC Hong Kong branch, and Bank of Singapore networks.

• While OCBC has kept OCBC Wing Hang and OCBC Hong Kong branch’s legal entity separate, there continues to be deep connectivity between the entities with cross referrals of customers across the entities. OCBC, through the entities collectively, offers integrated services across consumer banking, treasury and market, private banking, corporate banking and investment banking.
• OCBC Wing Hang has since embarked on a growth phase to expand its existing and new customer franchise and improve productivity as it streamlines existing processes having merged OCBC China and Wing Hang China to form OCBC Wing Hang China. This, in addition to the hubbing of Macau Treasury to Hong Kong and integrating Financial Institutions Business from OCBC Hong Kong branch, has led to an improved cost-to-income ratio of 46.9% (-5.5% y-o-y).

Differentiated approach for OCBC Wing Hang.

• OCBC Wing Hang continues to take a differentiated approach of having a single integrated platform to serve both business owners/ individual clients and SMEs within the same branch, which differs from local Hong Kong banks’ approach. Since 2014, the strategy has continued to serve OCBC Wing Hang well, having seen a 36% and 500% increase in new-to-bank consumer and SME customers in 2018 respectively.
• OCBC Wing Hang had also sharpened its focus at end-2018 by re-launching its premier banking service.

Greater China continues to be largest market outside Singapore.

• OCBC continues to focus on three key regions in Greater China, namely
  1. Jing-Jin-Ji region,
  2. Yangtze River Delta region, and
  3. Greater Bay Area (GBA) as
  Greater China continues to be the largest market outside Singapore, contributing 19% to OCBC’s profit in 2018. Since then, OCBC has established its Regional Digital Centre in Shenzhen where it envisages to have 200 staff (currently 80) to leverage on talents in the region to provide technological resource support, including coding, digital transformation initiatives and applications for export to the rest of the group.

Targets to almost double Greater China profit before tax and loans by 2023.

• As OCBC continues to deepen its connectivity in the region and its Southeast Asian network, OCBC believes it remains on track to hit S$1bn profit before tax from its Greater China contribution by 2023 (2018: S$605m), with S$80bn loan book (2018: S$45bn), and number of employees growing at a CAGR of 3%.
• OCBC envisages Greater China earnings to contribute 20-25% of the group’s earnings (2018: 19%), with 15-20% coming from Malaysia (2018: 16%), 6-8% from Indonesia (2018: 6%) and 50-55% from Singapore (2018: 54%).

Market opportunities may bode well for longer-term regionalisation strategy; we remain cautious on execution risks.

• Assuming a comfortable CET1 ratio of 13-13.5%, OCBC may have excess capital of up to S$3bn (as at 2Q19). OCBC has maintained the need for capital amid volatile markets as well as for any market opportunities that may arise across OCBC’s four key geographies and three core business pillars.
• Previously, OCBC was reportedly looking towards the liberalisation of foreign bank ownership in China, where it owns a 20% stake in Bank of Ningbo, where both banks are actively collaborating and cross-referring customers. More recently, various media outlets have cited that OCBC is weighing a bid for Bank Permata’s 88.6% stake held jointly by Standard Chartered and Astra International.
• While we believe that either market opportunity may bode well for OCBC’s longer-term regionalisation strategy, in both Greater China and Indonesia, we remain cautious on the execution risks involved as well as valuations paid for the associated market opportunity, if any.

Source: DBS Research - 16 Aug 2019