Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2018-03-22: Intelligent Banking Services

OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - Intelligent Banking Services

We are encouraged to see OCBC embarking on many IT initiatives to improve operating efficiency. It has set up an in-house unit with an initial investment of S$10m to develop AI capabilities for wealth advisory and loan financing.
The impending IPO or trade sale of its 30% stake in Great Eastern Life Assurance (Malaysia) (GELM) in 4Q18 to comply with limits on foreign ownership is another catalyst.
Re-iterate BUY and target price of S$14.95.

Oversea-Chinese Banking Corporation (OCBC) has established an in-house unit to develop artificial intelligence (AI) capabilities. Management has budgeted an initial investment of S$10m to drive AI adoption across commercial banking services, such as wealth advisory and loan financing.
The AI unit - AI Lab@TOV (The Open Vault) - serves as a test bed to demonstrate feasibility of new AI technologies before integration with OCBC’s existing systems. OCBC’s AI-powered chatbot, which was launched in Jan 17, has already generated more than S$100m of home loans.

OCBC’s retail customers are now able to perform day-to-day banking and make cashless payments using their voice. The services are available for customers using OCBC Mobile Banking and OCBC Pay Anyone apps with iPhone running on the iOS11 operating system.
Customers are able to conveniently check their bank account balances, outstanding credit card balances and details, and make instant cashless payments using Siri, Apple’s virtual assistant.

OCBC has built two software programmes, named Bob and Zac, utilising robotic process automation technologies for deployment in consumer secured lending and finance.
Bob handles home loan restructuring, including verification of customers’ data, determining eligibility for restructuring and recommending appropriate home loan restructuring packages. Bob takes one minute to complete the 199 process steps, compared to 45 minutes for a person.
Zac takes 12 minute to complete the 166 process steps to generate daily sales performance reports, compared to two hours for a person.
Top management now receives sales reports promptly at 9am daily instead of 4pm, which enables more effective decision making.

OCBC’s new regional data centre, purpose-built to prevent security breaches from cyberattacks, was fully operational since 3Q17. The 6-storey facility has a built-up floor area of 134,500sf and was developed for S$240m.
It serves the needs of OCBC group, including Bank of Singapore, OCBC Wing Hang, Great Eastern, Lion Global Investors and overseas branches across 18 countries.

It is encouraging to see OCBC embarking on many IT initiatives to improve efficiency.

OCBC possesses the greatest potential to improve productivity by trimming its headcount of 29,174, the largest among local banks, with investments in IT and automation. Its income per employee and PPoP per employee grew at a rapid CAGR of 5.8% and 5.0% respectively in 2013-17.

Great Eastern Holdings (GEH) has to reduce its stake in Great Eastern Life Assurance (Malaysia) (GELM) from 100% to 70% to comply with limit on foreign ownership for insurers operating in Malaysia. This could be accomplished through an IPO or trade sale.
We value GELM at P/B of 6.0x based on Gordon Growth Model (ROE: 42%, COE: 9.5%, growth: 3%). The 30% stake in GELM is worth S$760m if we apply a discount of 20% for the IPO. We expect OCBC to recognise divestment gains of S$608m in 4Q18. Its fully-loaded CET-1 CAR would also improve by 0.2ppt to 12.9%.

Maintain BUY. Our target price of S$14.95 is based on 1.54x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.3%, COE: 7.75% (beta: 1.05x), growth: 3.0%).

An IPO or trade sale of its 30% stake in GELM, which generates capital for re-investment in OCBC’s core commercial banking franchise.
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/ 2018-03-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.950 Same 14.950