Virtual Tie-up With Singtel Can Expand Reach; Maintain HOLD

• Media reports state that OCBC (SGX:O39) is in discussions with SingTel (SGX:Z74) for a partnership in virtual banking.
• Access to SingTel’s largely mass-market subscriber base in Southeast Asia and strong positioning in Singapore should enable OCBC to target more relevant customer segments via virtual banking at lower acquisition costs than its own branch network. While this should help it bridge its returns gap with Singapore peers in operating income and particularly retail banking, we believe execution risks remain.
• Uncertainties surrounding potential M&As given its large, excess capital further muddy medium-term earnings visibility. HOLD and our multi-stage DDM (9.7% COE, 3% terminal) Target Price stays at SGD11.05.
• We prefer UOB (SGX:U11) for better regional integration and cautious loan book.

Access to Large, Regional User Base

• OCBC reaches 9m customers through 500 branches in Southeast Asia. SingTel, together with its associates, reaches 690m subscribers. Nearly 90% of its subscribers outside Singapore are mass-market, prepaid customers. In our view, this dovetails with what we expect Singapore virtual banks to eventually shape up to be: platforms to reach mass-market, underserved customers in Southeast Asia.

Expanding Reach, But Is It Enough?

• Access to SingTel’s largely mass-market subscriber base in Southeast Asia and strong positioning in Singapore should enable OCBC to target more relevant customer segments via virtual banking at lower acquisition costs than its branch network.
• The primary target in virtual banking is the underbanked, especially young professionals starting out in their careers with limited savings. According to the World Bank, 80% of the people in Indonesia, the Philippines & Vietnam and 30% of those in Malaysia and Thailand were underbanked. SingTel’s associates have a strong presence in almost all these markets, potentially providing a powerful distribution channel for OCBC.
• OCBC’s own distribution in Southeast Asia is limited to 9m customers through 500 branches. SingTel, together with its associates, reaches 690m subscribers. Nearly 90% of its subscribers outside Singapore are mass-market, prepaid customers – the demographic most suited for virtual banking, as we discussed above.
• Similar ‘bank+telco’ virtual-banking models can be seen in Softbank’s investment in Revolut, UK, ZhongAn Insurance, HK and StanChart’s & PCCW’s investment in a Hong Kong virtual bank. We believe an OCBC+SingTel virtual bank can considerably widen the bank’s customer reach. However, success will partly rest on how quickly OCBC ramps up its tech spending, which is significantly behind peers.

Opportunity to Close in on Competitors’ Returns; Still Some Catch-up to Do

• In the past three years, OCBC’s retail/wealth-management average ROAs were nearly 72bps behind the rest of the sector, although it had the largest local-bank private-wealth AUM.
• In the same by 18bps despite the banks’ similar regional footprints.
• An OCBC+SingTel virtual bank may close this regional synergies, in our view

Maintain HOLD

• The timing of an OCBC+SingTel virtual bank is unclear, if it happens at all. In the meantime, with a high 14.4% CET 1, OCBC is carrying significant excess capital which management may tap for M&As.
• This increases execution uncertainties and reduces earnings visibility, in our view.
• Maintain HOLD.

Source: Maybank Kim Eng Research - 28 Aug 2019