Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-05-15: Key Takeaways From Analysts’ Day

Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-05-15: Key Takeaways From Analysts’ Day OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - Key Takeaways From Analysts’ Day

  • OCBC’s Analysts’ Day held last Friday showcased OCBC’s “stay true” philosophy, OCBC Life Goals, chatbot Emma, results from digitalisation and synergies from the acquisition of Barclays’ wealth & investment management business. The event highlighted the strength of OCBC’s franchise in wealth management and private banking. 
  • Maintain BUY. Target price: S$11.70.



WHAT’S NEW


Authenticity by staying true. 

  • Oversea-Chinese Banking Corporation (OCBC) will differentiate itself by providing genuine value (no gimmicks) to reward its customers.
  • Management has made a conscious effort to remove fine prints with hidden conditions from all advertisements. Complicated mechanics of products would be reduced and explained in a simple manner. Conditions, if any, would be stated clearly upfront so that customers understand what they are getting. While such efforts to stay true could jeopardises short-term growth in sales, it would improve OCBC’s rapport with loyal customers over the longer term.

OCBC Life Goals. 

  • OCBC Life Goals (OLG) focuses on providing solutions to help customers achieve their life goals, instead of the usual repetitive focus on products. Goalbased conversations enable OCBC to understand clients’ unique goals, such as retirement, children education and legacy planning, and allow clients to be understood.
  • OCBC has developed self-directed OLG applications on its website. OLG customers are 26% more satisfied and more open to purchase new products. In future, OCBC will also help customers achieve short-term goals such as first home, first car and travel.

Introducing Emma. 

  • OCBC launched Emma, a chatbot with artificial intelligence capabilities, in Jan 17. Emma can answer common questions on home loans and renovation loans and is equipped with a total debt service ratio (TDSR) calculator. More than 10% of chat sessions have been converted to home loan sales prospects.
  • Productivity increases as Emma has already sussed out customers’ specific needs and product specialists could focus on empathy and connection. So far, Emma has handled 34,000 enquiries and loans of S$28m were approved.

Achievements of digital initiatives. 

  • About 12% of 360 accounts are opened online, of which 60% are new customers. Half of all transactions for unit trust are conducted online, of which one-third are new to investing with OCBC. 
  • Profitability of digital customers is higher by 2.1x while digital sales growth is three times that of branches. 
  • Usage of branches has reduced by 7% and OCBC has downsized its network of branches in Singapore by 13% from 54 in 2013 to 47 currently. 
  • Head count for tellers has also been reduced by 16%.

Maintaining growth momentum at BOS. 

  • Bank of Singapore’s (BOS) strength lies in its open architecture, carrying a comprehensive array of products from a broad spectrum of financial institutions. It has a diversified revenue mix. The largest contributor was funds and discretionary portfolio management (DPM), which accounted for 28% of revenue in 2016. AUM for DPM has grown at CAGR of 36% to US$7b over the past seven years.
  • The acquisition of Barclays’ wealth & investment management business in Singapore and Hong Kong has added AUM of US$15.2b, boosting total AUM by 23.8% to US$79.2b. Barclays has strong franchise for non-resident Indians and North Asia. The acquisition also added capabilities in complex derivatives and foreign exchange margining system.

Another acquisition but on a much smaller scale. 

  • OCBC has agreed to acquire National Australia Bank’s (NAB) private wealth business in Singapore and Hong Kong at about 1x P/B. The business comprises a US$1.7b mortgage portfolio (half of the properties in Australia, mainly Sydney, Melbourne and Brisbane, and the rest in the UK, Hong Kong, New Zealand and Singapore) and deposits of US$3.1b (A$, HK$, S$ and US$). It has 11,000 customers across two markets (Singapore: 7,000, Hong Kong: 4,000). This is a small acquisition that marginally boosts OCBC’s total loans by 1.1% and total deposits by 1.5%.
  • The acquisition is expected to complete by the end of the year. It is expected to be earnings accretive within the first year after completion.


STOCK IMPACT

  • On track for growth in wealth management. The Analysts’ Day showcased the strength of OCBC’s franchise in wealth management and private banking through BOS.
  • Analysts were also briefed on the progress and positive results from its efforts in digitalisation.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price of S$11.70 is based on 1.30x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.8%, COE: 7.75% beta: 1.05x, growth: 1.0%).
  • The stock provides an attractive dividend yield of 3.4%.


SHARE PRICE CATALYST

  • Growth from regional markets in Indonesia, Hong Kong and China.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.700 Same 11.700



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