OCBC - DBS Research 2018-09-25: Investor Day Key Takeaways ~ On A Continuous Digital Transformation Journey


OCBC - Investor Day Key Takeaways ~ On A Continuous Digital Transformation Journey

  • Digital transformation journey, a core strategy since early 2010s, yielding significant results.
  • Management shared tangible “digital” targets going forward.
  • AI as OCBC’s core competitive differentiator; deepening of AI capabilities to start delivering considerable benefits over next 5 years.
  • Maintain HOLD, Target Price of S$12.40.

What’s New

Digital transformation journey, a core strategy since early 2010s, yielding positive results.

  • We attended OCBC’s Investor Day on 24 September. Management shared insights into its digital transformation journey since the early 2010s where OCBC focused on delivery through “OCBC.com” as part of its consumer strategy. Since then, various efforts placed to enhance its digital transformation journey has yielded significant results, with OCBC cutting down 14% of branches and 15% of teller headcount, and seeing a 3x improvement in sales leads conversion since 2012.
  • The significant increase in digital customers across Singapore consumers and SMEs has also led to higher revenue (2x and 3x more respectively) compared to non-digital customers. As at end-June 2018, 87% financial transactions and 70% of remittances are performed digitally.

~ SGinvestors.io ~ Where SG investors share

Management shared tangible “digital” targets going forward.

  • Management also elaborated on its tangible “digital” targets. OCBC’s target cost-to-income ratio is approx. 40% at a steady state, as its digital transformation journey continues to yield cost savings as well as incremental earnings. Management believes that such a steady state will materialise by 2023.
  • Today, 48% and 60% of OCBC’s consumer and SMEs customers respectively, across all core markets are on the digital platform. OCBC hopes to increase this proportion to 60% and 70% respectively at steady state.

Fintech collaborations and AI believed to drive widespread and sustainable transformation.

  • The Open Vault, started in 2016, has accelerated innovation through fintech collaborations as OCBC believes in embracing fintechs as co-innovators and as agents of change and that technologies offered by fintechs will help to accelerate the transformation across businesses as well as transform core processes. 
  • Several fintech solutions are work-in-progress, including transaction monitoring using unsupervised learning and automated AML compliance analysis.

AI as OCBC’s competitive differentiator.

  • OCBC has begun embedding AI in various process transformation and value propositions. For instance, analytics and insights are believed to have generated S$110m of shadow revenue, representing ~30% of overall new product sales in FY2017. OCBC believes that AI will start delivering significant benefits over the next 5 years through creating customer intimacies and driving business scalability, resulting in 20% lift in staff productivity or man-hours saved to complete a task.
  • OCBC continues to deepen its AI capabilities as it builds its data science platform housing the enterprise data warehouse, sandbox, software, tools and hardware under one roof alongside its open Application Programming Interface (API) platform. OCBC also envisages 85% of its applications to be placed on cloud in the future (2018: 35%) which will bring about manpower and time savings.

Digital transformation is an integral part of OCBC’s corporate strategy.

  • While continuing to redefine customer engagement, growing and deepening various customer segments, OCBC is investing and cultivating a digital culture and empowering its workforce with digital skillsets, transforming its core while it continues to enhance its technology workforce with 3x more developers and 2x more project managers.
  • OCBC has also set up an IT resource team in Shenzhen which is envisaged to be its regional IT hub in Greater Bay Area.

Our Thoughts

  • OCBC elaborated comprehensively on its ongoing digital transformation journey since the early 2010s alongside multiple test case demonstrations (SME business dashboard, virtual chatbots, AI applications in processes, robo-investing amongst others), while reiterating that a digital transformation journey is an integral part of its corporate strategy as it continues to grow its franchise, deepen relationship and drive loyalty through digital efforts.
  • While OCBC is unlikely to establish separate “digital bank” entities in new markets, we believe that as OCBC scales up its digital transformation across core markets, it will be able to leverage on data and AI, collaborate with fintechs and ecosystem partners to engage with and create value for its customers across its core commercial, wealth management and insurance segments.

Sue Lin LIM DBS Group Research | https://www.dbsvickers.com/ 2018-09-25
SGX Stock Analyst Report HOLD Maintain HOLD 12.40 Down 13.520