Oversea-Chinese Banking Corporation (OCBC) - UOB Kay Hian 2019-08-19: Successful Integration Of Wing Hang; Opportunities From GBA Beckon

OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation (OCBC) - Successful Integration Of Wing Hang; Opportunities From GBA Beckon

The acquisition of Wing Hang Bank has provided OCBC with a platform to grow its Wholesale Banking, Treasury and Private Banking businesses. The next phase of growth involves capturing business opportunities in the Greater Bay Area (GBA) and cross-border flows between China and ASEAN countries.
Having successfully integrated OCBC Wing Hang, OCBC is poised for inorganic growth within the core markets of Singapore, Malaysia, Indonesia and Greater China.

We attended OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s Corporate Day held in Hong Kong last week:

Prior to the acquisition of Wing Hang Bank (WHB), Greater China contributed S$208m or 6% of group PBT in 2013. Since then, contribution from Greater China has grown to S$1,037m or 19% of group PBT, representing 5-year CAGR of 38%. On an organic basis, we estimate that OCBC Wing Hang (Consumer and SME) would have grown at 5-year CAGR of 4%, compared with 21% for its Hong Kong branch (Wholesale Banking) and Bank of Singapore (Private Banking).
From a business franchise perspective, including cross-border flows booked in Singapore, operating profit from Greater China would have expanded from S$476m to S$1,628m, representing a 5-year CAGR of 28%.

OCBC has realised growth from new markets:
1. revenue related to the Pearl River Delta (PRD) grew 126% y-o-y in 1H19, and
2. OCBC has secured new businesses from new industries, such as Healthcare, Education and Logistics, worth HK$1.7b in 2018.
3. OCBC has launched cash management system Velocity to grow its operating accounts in 2019.

AUM from Greater China expanded by 4x from US$9b to US$36b, representing 5-year CAGR of 32% (OCBC group: 1.8x or 5-year CAGR of 12%). Greater China accounted for 35% of group AUM in 2018. AUM per client has improved by 2.5x despite a doubling of headcount for relationship managers (RMs).
Bank of Singapore (BOS) plans to address ultra-high net worth clients’ needs for Wealth Preservation and Succession through its capabilities in wealth planning and structuring.

OCBC Wing Hang’s total treasury sales revenue has grown 13x since 2014, driven by a 27x increase in hedging solutions.
OCBC established its North Asia Treasury Hub in Hong Kong in 2017. Going forward, OCBC Wing Hang plans to launch new products, such as equity-linked notes and interest rate hedging solutions, and digitise its treasury products on an e-platform.

Hong Kong has abundant supply of US dollar due to the Hong Kong dollar’s peg to the US dollar. Deposits denominated in US dollar expanded from 23% to 31% of total funding base over the past five years. Likewise, deposits denominated in Hong Kong dollar has expanded from 2% to 10% of total funding base.

Greater Bay Area (GBA) comprises Guangdong province (9 key cities: Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen, and Zhaoqing), Hong Kong and Macau, which forms a formidable hub. GBA accounted for 5% of China’s population and 12% of China’s GDP. OCBC is currently the 4th largest foreign bank in GBA with 89 branches (Hong Kong: 66 branches, Shenzhen: 5 branches and Guangzhou: 3 branches).
GBA contributed PBT of S$605m or 37% of PBT from Greater China. Management target to double PBT from GBA to S$1b in 2023, which represents a 5-year CAGR of 11%. This is supported by loan growth of 12% per annum to S$80b by 2023. Overall, management expects Greater China to account for 20-25% of group PBT by 2023 (2018: 19%).

Management has implemented a 5-year strategic plan conducted over three phases:
- Phase I: Preserve (2014-15) – Retain customers and preserve revenue streams.
- Phase II: Enhance (2015-16) – Deepen customer relationships, improve efficiency and expand product suite.
- Phase III: Grow (2017 onwards) – Grow new franchises and revenue streams. Realise potential of a regional bank through Greater Bay Area (GBA) strategy.
PBT has accelerated to a 3-year CAGR of 17.4% during Phase III in 2016-2018. Asset quality remains stable with NPL ratio for OCBC Wing Hang at 0.58% (OCBC group: 1.48%). Management plans to invest HK$400m over the next three years to enhance its digital offerings.
OCBC Wing Hang started preparation of internal rating-based approach (IRBA) to calculate risk-weighted assets (RWA) in 2016. Management expects IRBA to be approved and fully implemented in 2020.

Maintain BUY. Our target price of S$14.48 is based on 1.40x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.00% (Beta: 1.1x) and Growth: 1.0%).

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-19

SGX Stock Analyst Report BUY MAINTAIN BUY 14.48 DOWN 14.620