7 Things To Know About Oversea-Chinese Banking Corp. Limited Before Investing

Oversea-Chinese Banking Corp. Limited (OCBC) (SGX: O39) ([stock_quote symbol=”SGX:O39″ show=”name” nolink=”1″ class=”1″])is one of three locally listed banks in Singapore. It is the second largest bank by market capitalization in Southeast Asia, at about S$43.2 billion as at 22^nd May 2017.

Listed on the Singapore Exchange, OCBC Bank’s key markets are Singapore, Malaysia, Indonesia and Greater China. It has more than 610 branches and representative offices in 18 countries and regions. These include the more than 340 branches and offices in Indonesia under subsidiary Bank OCBC NISP, and over 100 branches and offices in Hong Kong, China and Macau under OCBC Wing Hang Bank.

Private banking services at OCBC are provided under its subsidiary, Bank of Singapore, while its insurance business is run under its listed subsidiary, Great Eastern Holdings Limited (SGX:G07) ([stock_quote symbol=”SGX:G07″ show=”name” nolink=”1″ class=”1″]). Great Eastern is the oldest and most established life insurance group in Singapore and Malaysia. Lastly, the bank runs its asset management operations under its subsidiary, Lion Global Investors.

OCBC is a huge financial institution with many moving parts. However, is OCBC still a good investment opportunity? Here are 7 things you need to know about OCBC before making a decision.

1. Stock Information

TICKER SYMBOL: SGX:O39

MARKET CAP: SGD 43.2 billion

SECTOR: Financial

INDUSTRY: Banking

2. The Business

OCBC’s income generation falls under two broad categories; net interest income and non-interest income.

The first category entails OCBC’s core business, which is to lend money. Under this category OCBC generates revenue from the interest differences on money it lends out versus the money it pays to depositors. This difference is called the Net Interest Margin or “NIM” for short.

In 2016, OCBC, net interest income came in at S$5.05 billion which made up 59% of its total income.

The other category, non-interest income can be further broken down into three groups. The groups are fee & commissions, wealth management and life assurance.  The fee & commissions segment makes money by collecting a small fee for services or transactions that the banks helps its customers make for a variety of services. Wealth management segment which is run under the banks subsidiary Bank of Singapore offers wealth services to premium customers such as investment advice, portfolio management and others. And lastly, life assurance is the bank’s insurance business that it runs with its subsidiary Great Eastern.

In total these three groups contributed S$3.44 billion in income for the fiscal year 2016 representing the other 41% of total income. The breakdown of each group is as follows:

Group	Revenue
Fee &commissions	S$1.64 billion
Wealth Management	S$2.27 billion
Life assurance	S$0.5 billion

Source: OCBC 2016 earnings

From the table above, it can be seen wealth management was the biggest contributor to non-interest income followed by OCBC’s fee & commissions business.

It is interesting to point out also that the fee & commissions group can be further broken down into another ten segments. These are Brokerage, Wealth management, Fund management, Credit card, Loan-related, Trade-related and Remittances Guarantees Investment banking, Service charges, Others.

3. Key Opportunities

• Banking in Hong Kong and China

OCBC bought over a Hong Kong bank, Wing Hang Bank in 2015. The bank is now renamed as OCBC Wing Hang. This purchase brought with the opportunity for OCBC to get its feet into the fast-growing China market. Through Wing Hang, over the last year, OCBC has expanded its operations from Hong Kong to China and even Macau.

Having a presence in China is very important as it allows the bank to gain the trust of the Chinese citizens and businesses. This will come in handy when businesses in China want to expand to Southeast Asia and they might choose OCBC as their banking partner and advisor.

• Reversal of Interest Rate

The rise of interest rates has been front and centre for a while now, everytime the Federal Reserve (FED) in the US talks about hiking the interest rates the banks are always “happy”. This is because a rise interest rates mean that banks earn more revenue and profits from its core business of lending money. Over the three year period from 2014 to 2016, the NIM rate remained fairly flat at 1.67%. However, on a quarterly basis at the end of 2015 and the start of 2016, NIM was 1.74%. If the NIM expands, the bank’s core earnings will likely see a strong boost.

The increase in interest rates is also not something unforeseen as the FED has signaled its intention to raise interest rates 3-4 times this year.

4. Key Risks

• Non-Performing Loans (NPL) on the rise

Between 2015 and 2016, OCBC saw its NPL increase from S$2 billion to S$2.89 billion.  NPL is basically the term the bank uses to report the amount of loans for which repayments from its debtors that are questionable. This means that the bank possibly expects to lose some money in the future if the loans cannot be recovered or repayment was not completed.

One of the main reasons for the huge increase in NPL over the year was due to the slowdown in the Oil & Gas sector that is ongoing. This segment contributed approximately to half of the group’s NPL for the period. It is uncertain when this will recover. It can be a long drawn drag for the OCBC as more of its corporate clients fall into financial hardship.

• The Rise of Fintech

The other big threat which is facing the bank is FinTech. FinTech is the term used for new financial startups focusing to disrupt the financial industry. This is a fast-growing segment that could potentially take business away from OCBC. Companies like Paypal, Alipay and Tencent are fast becoming the first choice for millennials for their payment needs. These services also allow individuals to store money in these accounts. Alipay for example, even pays an interest on the stored money, much like a bank. As such, services like these could potentially disrupt the banking industry and OCBC in the future.

5. Valuation

OCBC currently trades at a price to book (P/B) ratio of 1.2 and has a dividend yield of 3.5%. The P/B ratio is slightly lower than its five-year average of 1.3 while its dividend yield stands at 3.6%.

6. Investor Relations

Investor Relation Material:

• Annual Report

For Investor Enquiries
Investor-relations@ocbc.com

65 Chulia Street #29-08 OCBC Centre

Singapore 049513

7. Top Shareholders (2^nd August 2016)

• Lee Foundation – 19.87%
• Selat (Pte) Limited– 11.52%

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity. It does not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.

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