OVERSEA-CHINESE BANKING CORP
SGX:O39
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
SGX Stock
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