OCBC Bank - CGS-CIMB Research 2018-09-24: Digitalisation Is The New Normal


OCBC Bank - Digitalisation Is The New Normal

  • 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.

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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.
  • For OCBC Investor Day full presentation slides click here.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-24
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