Embracing the One-Group approach
Investment Thesis:
Driving growth across Asia. OCBC has benefitted significantly from the enhancement of its franchise value post the acquisition of Wing Hang Bank in 2014, given that Greater China continues to be management’s focus as a key market outside Singapore, contributing c.15% of the group’s income in FY22. The bank aims to capture rising Asian wealth and support, increasing Mainland China-HK and ASEAN-Greater China flows to deepen its regional presence and drive sustainable growth through its One-Group approach.
Limited catalysts for now as Fed rate cycle nears peak. As the Fed rate comes close to its peak in this cycle, we believe there will be further downside to OCBC’s NIMs, especially as competition for quality loans and pressure from funding costs continues to grow. While OCBC’s 1Q23 NIM held up well at 2.30% (-1bps q-o-q), management guided that NIM has likely already peaked and will trend downwards for the rest of the year, with FY23F NIM at ~2.2%.
Further downside risks and asset quality risks may emerge. Management’s FY23F loan growth guidance was revised downwards in 1Q23 to a low to mid-single-digit (previous: Mid-single-digit). While asset quality remains benign in 1Q23, we believe management will top up general provisions as it guides for a more normalised credit cost of 15-20bps in FY23F in a more uncertain environment.
Maintain HOLD, TP of S$13.00 based on the Gordon Growth Model (12% ROE, 3% growth, and 11% cost of equity). Our TP represents a ~1x FY24F, below -0.5SD of OCBC’s 12-year forward P/BV multiple. We believe this is a fair valuation, as we see limited catalysts ahead for OCBC’s share price, given more downside risks arising from NIM, loan growth, a more uncertain macroeconomic environment for non-interest income growth, as well as rising asset quality risks. We believe the downside to OCBC’s share price will be supported by its strong provisions buffer of 121% and potential excess capital of S$5bn during FY23F.
Key Risks
WHAT’S NEW
Takeaways from OCBC ASEAN-Greater China Update 2023
One-Group approach as part of overall strategy. OCBC held a conference in Hong Kong, highlighting its progress in growing its ASEAN-Greater China franchise and outlining its refreshed strategy to gain a stronger foothold in the region. The group started off by unveiling a new unified logo that was revamped for the first time in more than two decades to be used across all its businesses (except Bank of Singapore), emphasising a cohesive brand presence and reinforcing its One-Group approach across its business segments (banking, wealth management, and insurance) as part of its overall strategy.
Capture business opportunities in ASEAN-Greater China. OCBC hopes to accelerate its growth in ASEAN-Greater China by leveraging its strong presence in the region. On top of servicing the seven key markets in ASEAN which contribute more than 98% of the economic growth in the region, OCBC is also one of the top five foreign players by total assets in Greater China, with S$93bn in assets and a 20% stake in Bank of Ningbo. Over the past decade, OCBC has made substantial inroads in the region, with ASEAN currently contributing 60% of its income growth while Greater China revenue saw a 22% CAGR from 2013-2022. Going forward, the bank plans to execute a refreshed strategy, namely 1) by anchoring market leadership as a top-two financial institution in ASEAN by assets; 2) structurally strengthening its income-generation capabilities; 3) improving operating efficiency and its cost-income ratio; and 4) focusing on capital deployment in high-growth markets in ASEAN-Greater China.
Beneficiary of ASEAN-Greater China regional flows. The reopening of China and the implementation of strategies like China Plus One, among other factors, have led to a rise in ASEAN-Greater China regional flows. With its One-Group approach, OCBC believes it is well positioned to capture these increasing flows, underpinned by seamless support across the markets and the bank’s thorough understanding of sector dynamics as well as client needs. Besides traditional industries like infrastructure and construction, OCBC is also seeing growing interest from new economy industries such as fintech and e-sports to expand their presence to ASEAN, in which OCBC can offer its cross-border expertise and value-added services to support their efforts to scale up.
Gearing up to serve Asia’s rising wealth. OCBC has performed well in growing its wealth business, with its Premier segment making up 62% of the wealth management fees in 2022 (2.5x increase since 2013) and 58% of AUM (3.5x increase since 2013) while Bank of Singapore, OCBC’s private banking subsidiary, has tripled its AUM and doubled its revenue since 2013. Looking ahead, OCBC plans to 1) double the AUM of its Premier segment for the Greater China market by 2025 by leveraging its twin hubs (Singapore and Hong Kong); and 2) grow its AUM under Bank of Singapore to US$145bn by end-2025 from ~US$124bn currently.
Growth targets for the ASEAN-Greater China franchise. OCBC aims to deliver an incremental S$3bn in cumulative revenue in 2023-2025, above its current growth trajectory, with a deeper focus on ASEAN-Greater China. To achieve this, the bank plans to accelerate investment in its transaction banking capabilities in Greater China, investing >S$50m over the next three years and targeting >500 regional mandates for cash management over the next five years. It also envisages doubling its investment banking revenue in three years and acquiring >26k new SME customers over the next three years. In addition, OCBC aspires to better facilitate Chinese clients to operate in ASEAN, generating a >50% increase in revenue from its Greater China franchise in ASEAN by 2025.
Sustainability as a key pillar of focus. OCBC continues to be at the forefront of sustainability, and is close to achieving its 2025 target of a S$50bn sustainable finance portfolio ahead of time. In addition to setting net-zero targets for six key carbon-intensive sectors, other initiatives include discontinuing funding for the establishment of new coal-fired power plants, alongside the provision of project financing for upstream oil and gas projects.
