Singapore Banks - CGS-CIMB Research 2019-08-19: Beyond The Greater Bay


Singapore Banks - Beyond The Greater Bay

  • We tuned in to OCBC’s presentation on its Greater China (GC) franchise. Key focus areas are the Greater Bay, Jing-Jin-Ji (京津冀) and the Yangtze River Delta.
  • OCBC reiterates the franchise value created from acquiring Wing Hang Bank – banking top-tier HK firms and facilitating outward investments of local firms.
  • Maintain NEUTRAL. SG banks’ expansion into Greater China provides significant growth potential, but we remain wary of prolonged trade war and HK uncertainties.

OCBC Wing Hang to focus on domestic Chinese firms expanding abroad

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) held a session in HK and Macao to articulate the franchise value of its Greater China operations since its acquisition of Wing Hang Bank (WHB) in 2014, and its results so far are encouraging. The bank notes that its strength is in facilitating local customers expanding out of Greater China (vs. concentrating on domestic-centric firms) and will focus on growing this segment with its regional connectivity across Southeast Asia (SEA).

Wealth management remains a core focus in Greater China

  • Apart from enlarging OCBC’s commercial banking customer base, Wing Hang Bank brings about synergies and cross-selling opportunities for Bank of Singapore (BOS), the group’s private banking arm. Majority of Bank of Singapore clients on-boarded from OCBC Wing Hang have been clients of the franchise for 10-15 years – this relationship significantly shortens the time taken for Bank of Singapore to incubate the private banking clients, which typically takes 2-3 years.

How it all began – Wing Hang for OCBC and Dao Heng for DBS

  • OCBC’s acquisition of Wing Hang Bank in 2014 added some S$25bn in GC loans to the former’s portfolio – its expertise was in mortgages and funding SMEs. Notably, OCBC’s main rationale behind buying Wing Hang was to capitalise on future Asian trade opportunities given its network in the Pearl River Delta, and not so much for its retail franchise.
  • DBS GROUP (SGX:D05) pushed into Hong Kong’s banking space much earlier than peers with its acquisition of Dao Heng Bank back in 2001.
  • UNITED OVERSEAS BANK (UOB, SGX:U11)’s more organic approach in penetrating the region brings it the smallest Chinese exposure amongst peers (16% of gross loans).

We remain cognisant of property and trade-related exposures in HK

  • While Greater China has provided plentiful growth opportunities for all 3 Singapore banks, we remain cognisant of the effects of the US-China trade tensions, as well as the weakened business sentiment due to the unrest in Hong Kong. We believe that wholesale and retail trade, manufacturing and the transport segments are most sensitive to slower trade growth (10-21% of aggregated loans of the banks’ GC-based entities), while property-related segments could see the most drag from the prolonged situation in HK (18-33% of aggregated loans). These exposures do not represent a significant proportion of the banks’ exposures, but could be indicative of wider economic weakness and increased credit costs to come.
  • As a proportion, UOB appears to have a larger share of property-related loans and sizeable trade-related exposures, but its share of GC loans as a whole remains the smallest amongst peers. Capitalisation of the banks’ regional operations remain robust.
  • UOB remains our top pick, followed by DBS and OCBC.

OCBC – striding forward in Greater China

  • OCBC has made great strides in establishing its Greater China franchise since its acquisition of Wing Hang Bank (WHB) 5 years ago. Now rebranded as OCBC Wing Hang (OCBC WH), the bank focuses mainly on local companies expanding out of Greater China. OCBC’s regional franchise places it well to provide treasury facilities and supply chain support in SEA.
  • Contributions from Greater China now account for a significant 19% of OCBC’s PBT – a large step forward from the 6% in 2013, pre-acquisition of both Wing Hang Bank and Bank of Ningbo. This region has overtaken Malaysia as OCBC’s second-largest contributor, and we believe that this is likely to be the case going forward.
  • OCBC reiterates that its acquisition of Wing Hang Bank goes beyond just capturing the latter’s captive business flows in HK, and was more of a play on capitalising on Wing Hang Bank’s franchise value to elevate OCBC’s standing in Hong Kong, and as a window into the Chinese market. To this end, OCBC Wing Hang now banks the top-tier corporates of HK, and is able to provide a universal-banking platform to its customers given Wing Hang Bank’s original commercial banking book and OCBC HK’s treasury capabilities.
  • On its operating performance so far, the bank seeks to make a distinction between the Greater China PBT recorded in its consolidated financial statements of S$1,037m in FY18, and the S$1,628m recorded in its internal management reports for its Greater China franchise. We understand that the difference of S$591m between the two figures signifies the flows of its Chinese clients captured outside of the physical geography of Greater China – a testament to its strategy of focusing on outward-bound corporates. Regional connectivity of north Asia and SEA will be key to driving OCBC’s growth in the long term, in our view.
  • Apart from the growth in its lending book, a larger HK book has strengthened OCBC’s gathering of US$ funding – this rose from US$46bn in 2013 to US$91bn in 2018. The expansion of its HK$ funding book was more modest – from HK$3bn in 2013 to HK$28bn in 2018 – as the bank remains a relatively small player in the domestic market. OCBC’s push to build its wealth franchise in Greater China remains a priority – AUM has risen fourfold since 2013 to US$36bn.
  • Moving forward, OCBC has identified 3 key geographical areas to focus on – the Jing-Jin-Ji region, the Yangtze River Delta region, and the Greater Bay area. The Greater Bay area (Pearl River Delta + HK + Macau + Shenzhen + Guangzhou) is likely to be the key earnings contributor of this region come 2023, in our view. We believe three drivers could help OCBC achieve its aggressive targets:
    1. continued outward investment from Greater China into other parts of the world;
    2. demand for wealth management facilities as the internationalisation of China spurs a diversification of fund allocation; and
    3. increased capital market and treasury flows as Greater China becomes more developed.
  • Meanwhile, OCBC has not yet made much inroads in the insurance segment in Greater China. To date, the group’s presence in insurance comes via Great Eastern Life Assurance (China) Co Ltd, a 50:50 joint venture between Great Eastern and Chongqing Land Properties Group; contribution from this entity is small and business growth has been uninspiring. We understand that OCBC Wing Hang will have to reposition its insurance value proposition beyond its 33% stake in Hong Kong Life towards more investment-oriented products to mainland Chinese residents to pick up on growth.

OCBC Wing Hang – 5 years on

  • OCBC Wing Hang’s business encompasses HK, Mainland China, and Macau, and the strength of its operations lie within its local expertise (of Wing Hang Bank) and regional knowledge (OCBC). As important as new-to-bank customers are, maintaining existing customer relationships (from Wing Hang Bank) remain of paramount importance to OCBC Wing Hang. The enlarged presence of OCBC (OCBC Wing Hang + OCBC HK branch) allows it to understand the underlying flows of the economy and presents cross-selling opportunities across multiple products and countries. A merger of OCBC Bank (China) Limited and Wing Hang Bank (China) Limited streamlined its Macau treasury operations and Financial Institutions business into OCBC Wing Hang – its results was a 5.5% improvement in its CTI ratio to 46.9%. HK$400m will be spent over the coming three years on digitalisation initiatives to build open banking services, enhance its cyber defence system, and bring its digital banking ecosystem up to speed. We believe increased capital efficiencies in the near term are unlikely as OCBC Wing Hang’s adoption of IRB has been pushed back to end-2020 at the earliest.
  • On the advent of companies shifting their production lines out of Greater China into ASEAN given the escalation in US-China trade tensions, OCBC believes that the shift will be slow, but eventual. The bank notes some flows not only to Malaysia, Thailand and Vietnam, but smaller countries such as Myanmar as well – the bank has established its operations in all the countries mentioned.
  • Although we remain concerned about asset quality troubles in light of slower regional growth and the delayed effects of the trade war, domestic Chinese loans accounted for only about S$5bn of OCBC’s Greater Chinese loan base of S$63bn. Having said that, we believe that spillover effects of the trade war could also place the bank’s Greater China-based exposures to the wholesale and retail trade, manufacturing, and transport and transport equipment industries at risk of some credit quality deterioration given their close trade linkages with Mainland China.

Bank of Singapore and OCBC Wing Hang’s wealth segment

  • Since the acquisition of Wing Hang Bank, OCBC has gone on to acquire National Australia Bank’s private wealth business in HK and Singapore (2017), as well as Barclay’s wealth management segment (also in HK and Singapore, 2016) in its bid to strengthen Bank of Singapore’s value proposition.
  • The support from OCBC Wing Hang comes in the form of long-standing trust from its existing customer base. Most of Bank of Singapore (BOS) clients on-boarded from OCBC Wing Hang have been clients of the franchise for 10-15 years – this relationship significantly shortens the time taken for Bank of Singapore to incubate the private banking clients, which typically takes 2-3 years.
  • While Bank of Singapore notes an obvious shift of wealth towards the younger generation, a significant proportion of its client base is still first-generation Chinese. Notably, Bank of Singapore employs a 360 degrees wealth approach when engaging this segment – introducing wealth preservation products to the older generation and capturing the intergenerational wealth transfer to the ‘millennial’ segment, whose demands now go beyond the plain pursuit of personal wealth but include social-good-driven demands as well. Bank of Singapore also benefits from client flows from OCBC Wing Hang’s base of Chinese entrepreneurs and business owners.

A closer look at DBS, OCBC and UOB’s Greater China books

  • We take a look at the composition of DBS, OCBC and UOB’s Greater China-based legal entities. We believe that the wholesale and retail trade, manufacturing as well as transport and transport equipment industries will be most sensitive to a slowdown in global trade flows, while the property segment could see the largest impact from prolonged uncertainties in Hong Kong. We believe DBS is the most sensitive to a prolonged trade war between the US and China, while UOB could be impacted the most by lower property prices in HK.
  • For DBS, we aggregated the loan books of DBS Bank (Hong Kong) Limited, DBS Bank Limited (Hong Kong branch), DBS Bank (China) Limited and DBS Bank (Taiwan) Ltd. The aggregated Greater China-based exposure in our analysis accounts for 82% of DBS’s total Greater China loan book. In turn, Greater China accounted for 30% of DBS’s total gross loans.
  • Financial statements of OCBC Wing Hang and OCBC (Hong Kong branch) were used to aggregate OCBC’s Greater China-based loans. Together, these entities accounted for 63% of OCBC’s total gross loans in Greater China as at end-Dec 2018. In turn, Greater China loans accounted for 25% of the bank’s total gross loans.
  • Loans housed under UOB (Hong Kong branch) and United Overseas Bank (China) Limited were used in our analysis. Exposures of these entities accounted for 70% of UOB’s total Greater China loans; UOB has the smallest exposure to this region at only 15% of its group’s total gross loans.
  • Due to the varying presentation styles of the financial statements, there are some overlaps in the exposures we deem sensitive to US-China trade tensions and trade finance; these 2 lines should be read on a standalone basis and not cumulatively as the bank’s total exposure to a slowdown in trade.
  • Amongst peers, the bank has the largest sensitivity to a slowdown in trade – 21% of loans to the 3 industries mentioned or 15% of its book attributable to trade finance. To note, trade finance of these entities account for a larger 15% of DBS’s aggregated Greater China-based loan exposures – the 5% represented in Figure 13 only accounts for trade finance of DBS Bank (Hong Kong branch).
  • In terms of property-related exposures in HK, DBS’s share of exposure (18%) is generally on par with those of OCBC – behind UOB’s largest exposure of 33%. DBS’s total Greater China NPL ratio has held steady at 0.8%.
  • In Figure 14 (see attached PDF report), the three industries mentioned accounted for 10% of OCBC’s aggregated Greater China-based entities. The bank had the smallest share of loans related to trade financing amongst peers (3%, or 6% if including trade bills). Consistent with the slower loan growth numbers so far in FY19, we observed that corporates in the wholesale and retail trade industry had been stocking up on inventory in months prior, bracing for a potential elevation in trade tariffs in FY19. That said, impaired loans have not risen much since the trade war began – NPL ratio of OCBC Wing Hang stood at 0.58% as at end-2018, while that of OCBC Bank (HK branch) was 3.28% (OCBC group’s was 1.48%) – but prolonged uncertainty may weigh on the repayment capabilities of these companies in the medium term, in our view.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 12.530 SAME 12.530