Oversea-Chinese Banking Corp Ltd - Phillip Securities 2019-09-02: Creation Of Franchise Value In Greater China


Oversea-Chinese Banking Corp Ltd - Creation Of Franchise Value In Greater China

  • We attended OCBC (SGX:O39)’s Greater China Media and Sell-Side Analysts Briefing in Hong Kong and Macau on the 13th and 14th August 2019.
  • The event shared insights and updates on OCBC’s growth and transformation journey in Greater China over the last 5 years, as well as plans to continue to grow in the region.
  • Since the Wing Hang acquisition, earnings from Greater China tripled to 18% and AUM from wealth management tripled.
  • Maintain ACCUMULATE at a slightly lower Target Price of $12.32 (previous Target Price: $12.50). We increased our credit cost assumptions to 23 bps (previously 20 bps), and lowered our loan growth estimate to 4.0% (previously 4.4%).

Franchise value creation

  • Since the acquisition of Wing Hang Bank in 2H14, contribution from Greater China increased from 6% in FY13 to 19% in FY18. The acquisition of Wing Hang bank created franchise value of S$600mn in FY18, which is the difference between the S$1,037mn earnings recorded on the Greater China legal entity basis (where transactions or assets are booked) and the S$1,628mn earnings based on internal management reports that includes Greater China earnings generated from outside China.

Greater China – the Group’s largest market outside Singapore

  • OCBC executed its Greater Bay Area (GBA) strategy in 2017, identifying Hong Kong, Macau and the Pearl Delta Region as targets to strengthen core banking business in Greater China by capturing trade, capital and wealth flows in and out of GBA.
  • Moving forward, the Group will be expanding its strategy and focus on 3 key regions in Greater China; namely the Jing-Jin-Ji region, Yangtze River Delta region and the Greater Bay Area. OCBC expects synergy between the Group’s Greater China and ASEAN franchise as they capture flows from supply chain re-positioning in these two regions.
  • The GBA registered PBT of S$605mn in FY18, making up 58% of Greater China’s PBT of S$1,037mn. The Group targets to hit S$1bn in PBT from the GBA by 2023, representing a 5-year CAGR of 11%; supported by loans growth of 12%/year to reach S$80bn by 2023.

Hong Kong the core contributor to OCBC Wing Hang

  • Hong Kong contributed 73% to OCBC Wing Hang’s (OWH) earnings in FY18. OWH has been on a growth strategy since 2017 to increase existing and new customer franchise, create new revenue streams and improve productivity; by implementing the GBA strategy and three year digitilisation plan with an investment of HK$400mn since 2018. The merger of the two China entities (OCBC China and Wing Hang China) to form OCBC Wing Hang China streamlined processes.
  • In addition, the hubbing of Macau Treasury to Hong Kong and integration of Financial Institutions Business from the Hong Kong Branch resulted in CIR improvement of 5.5 p.p. to 46.9% in FY18 (FY17: 52.4%).

Integration of capabilities between Bank of Singapore, OCBC Wing Hang, and OCBC Hong Kong

  • The increased connectivity between Bank of Singapore (BOS), OWH and OCBC HK created a comprehensive suite of product and service offerings as well as cross referral of clients across consumer banking, corporate banking, investment banking, treasury and market and private banking. As a result, Greater China’s AUM and revenue tripled between 2013 and 2018; along with 2018’s AUM/client being 2.5x that of 2013’s. All these reflects OCBC’s ability to increase its pool of high net worth clients.

OCBC Wing Hang’s single integrated platform for SMEs and Consumers

  • Unlike OWH’s Hong Kong competitors, OWH’s differentiating approach is to serve both SME businesses and individuals within the same branch. This is to serve time-starved SME business owners faster in conveniently-located retail branches instead of being directed to a specific SME banking branch. OWH’s differentiation strategy proved effective as seen in a 5x increase in new-to-bank customers and 50% increase in SME customers between 2014 and 2018. In addition, 53% of OWH’s SME customers are also consumer customers.

Corporate banking synergy - Bank of Singapore and OCBC Wing Hang

  • OWH’s corporate clients from Hong Kong now have access to the entire product suite of OCBC Group, opening doors and providing support for corporates across the region. As a result, there is a 5x increase in referral, 3x increase in Treasury advisory income and 10x rise in corporate wealth management income between 2014 and 2018. Relationship-stickiness resulted in a 2x increase in revenue per customer between 2014 and 2018.

Maintain ACCUMULATE at a slightly lower TP

  • Maintain ACCUMULATE at a slightly lower Target Price of $12.32 (previous Target Price: $12.50). We increased our credit cost assumptions to 23 bps (previously 20 bps), and lowered our loan growth estimate to 4.0% (previously 4.4%).
  • We are positive on continued growth in OCBC’s Greater China franchise with China remaining as the largest economic activity generator in Asia. OCBC’s market share in Hong Kong and China is small, meaning there is still room for quality loan growth without affecting credit quality. In fact, Greater China’s NPL ratio is the lowest in all of OCBC’s regions, at 0.5% for OWH while group NPL stood at 1.5%.
  • However, the US-China trade tension may result in some deterioration in asset quality and more provisions, along with additional risks of slower loan and fees growth. The recent unrest in Hong Kong brings uncertainty in business and investor sentiment as well. OCBC does not expect the protest to poses a threat in the medium to long term and expects the protest to be resolved.
  • OCBC does not expect its medium to long term targets to change and suggested no noticeable increase in outflow from Hong Kong because of recent events. We believe OCBC’s share price could be volatile in the near term due to expectations of inorganic expansion (management expressed the need for strong capital levels amid volatile markets and for market opportunities and acquisitions).

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-09-02