Oversea-Chinese Banking Corp (OCBC) - RHB Invest 2019-08-20: Greater China Potential, But Already Priced In


Oversea-Chinese Banking Corp (OCBC) - Greater China Potential, But Already Priced In

  • Stay NEUTRAL with a new SGD11.50 Target Price from SGD11.80 Target Price, 7% upside plus 4.7% yield, based on 1.07x 2020F P/BV.
  • After attending the OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s presentation on its Greater China franchise, we are optimistic on further growth there. However, NIM contraction could lower overall earnings growth.
  • Our Target Price is derived from long-term ROE assumption of 11.7% (same as 1H19’s), factoring in digitisation-driven cost efficiencies accompanied by marginally-narrowing NIM.

Greater China earnings share tripled to 19%.

  • In FY13, Greater China – comprising China, Hong Kong, Macau, and Taiwan – accounted for 6% of OCBC's PBT. The 2014 acquisition of Wing Hang Bank contributed to growth in this region. By FY18, Greater China accounted for a 19% share of OCBC's PBT. This region’s SGD1,037m in FY18 PBT is 5x that of FY13’s, and management is bullish on further growth.

2018 wealth management’s assets under management (AUM) is 4x that of 2013’s.

  • In the latter period, OCBC’s Greater China franchise’s AUM was USD9bn. By 2018, this had risen to USD36bn. The 2018 AUM/client is 2.5x that of 2013’s, reflecting OCBC's ability to draw in clients with higher net worth. With greater economies of scale, the Greater China wealth management arm has also been able to lower the cost-income ratio 4ppts between 2013 and 2018.

OCBC Wing Hang Bank has shown recent PBT strength.

  • Between 2016 and 2018, this entity recorded 2-year PBT CAGR of 17.4%, reflecting its strength in the Greater China market. Worthy of mention is the increase in CASA ratio by 10ppts to 40% in 2018 from 2014.

The small & medium enterprise (SME) franchise and auto loans have strengthened.

  • OCBC had a Greater China SME loan balance of SGD2.8bn as at 2018 when compared with a not-meaningful number in 2013. Greater China’s auto loans balance of SGD1.9bn in 2018 compares with a not-meaningful number in 2013.
  • Some of the significant 2023 targets for China’s Greater Bay Area: 5-year CAGR PBT of 11% (starting from 2018) and 12% 5-year CAGR loan book – also starting from 2018.

Our TP is based on 1.07x 2020F P/BV.

  • Our OCBC valuation is based on long-term ROE assumption of 11.7%. The previous Target Price was based on an 11.9% ROE assumption. We lower our long-term ROE assumption, given increasing global economic uncertainties. Our target 2020F P/BV is 1.07x, from which we derive our new Target Price of SGD11.50.
  • We believe OCBC’s share price could be volatile in the short term, given expectations of inorganic expansion – management has also indicated that it is looking at opportunities.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-20
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 11.50 DOWN 11.800