Company Reports

We maintain our fair value estimate for OCBC of SGD 16 following the 2023 earnings performance, which was largely in line with our expectations. However, it is slightly disappointing that given a strong capital buffer, the group is not indicating any plans to raise their dividend payout. A dividend per share of SGD 0.82 represents a dividend payout of 53% for 2023. A common equity Tier 1 ratio of 15.1% allows OCBC to raise dividend payout materially, but we suspect the group is keeping funds for potential acquisitions.

Oversea-Chinese Banking is a long-established bank and one of the three largest banks in Singapore. It has expanded in the past two decades through acquisitions and we think it could do further mergers and acquisitions in Asia in coming years in banking, insurance, or wealth management. OCBC’s private-bank division, Bank of Singapore, was established by the acquisition of ING’s private bank when ING exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. OCBC's bancassurance business was built on the gradual acquisition of Singapore-based insurer Great Eastern. In Indonesia, the bank raised its stake in PT Bank NISP to 85% from 23%, and bought Wing Hang Bank in Hong Kong in 2014 as a platform to expand its presence in Greater China, on top of its 20% stake in affiliate Bank of Ningbo purchased in 2006.

We maintain our fair value estimate of SGD 16 for narrow-moat Oversea-Chinese Banking, or OCBC, after news that it was the top bidder for Commonwealth Bank of Australia’s Indonesian unit PT Bank Commonwealth, or PTBC. The upfront cash payment is AUD 220 million, less than PTBC’s net assets as of June 2023 of around AUD 390 million. We do not think OCBC is overpaying even if the complete terms that allowed its bid to prevail over other interested parties end up costing more than the upfront payment. That said, PTBC, with an estimated market share of loans in Indonesia of less than 0.2%, is not a strongly competitive bank, with a return on equity of around negative 11% in 2022. We think the key for OCBC will be integrating PTBC smoothly into its Indonesian unit Bank OCBC NISP, so that PTBC’s contribution to NISP’s future earnings is larger than the acquisition cost and any potential further losses at PTBC.

We maintain our fair value estimate of SGD 16 for narrow-moat Oversea-Chinese Banking, or OCBC, after its third-quarter earnings announcement. Our fair value estimate implies 1.4 times the 2024 book value and represents a 23% upside.

Oversea-Chinese Banking is a long-established bank and one of the three largest banks in Singapore. It has expanded in the past two decades through a series of acquisitions and we think it could do further M&A in Asia in coming years in banking, insurance, or wealth management. OCBC’s private-bank division, Bank of Singapore, was established by the acquisition of ING’s private bank when ING exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. OCBC's bancassurance business was built on the gradual acquisition of Singapore-based insurer Great Eastern. In Indonesia, the bank raised its stake in PT Bank NISP to 85% from 23%, and bought Wing Hang Bank in Hong Kong in 2014 as a platform to expand its presence in Greater China, on top of its 20% stake in affiliate Bank of Ningbo purchased in 2006.

Oversea-Chinese Banking is a long-established bank and one of the three largest banks in Singapore. It has expanded in the past two decades through a series of acquisitions and we think it could do further M&A in Asia in coming years in banking, insurance, or wealth management. OCBC’s private-bank division, Bank of Singapore, was established by the acquisition of ING’s private bank when ING exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. OCBC's bancassurance business was built on the gradual acquisition of Singapore-based insurer Great Eastern. In Indonesia, the bank raised its stake in PT Bank NISP to 85% from 23%, and bought Wing Hang Bank in Hong Kong in 2014 as a platform to expand its presence in Greater China, on top of its 20% stake in affiliate Bank of Ningbo purchased in 2006.

We maintain our fair value estimate of SGD 16 for narrow-moat Oversea-Chinese Banking after its second-quarter earnings. Our fair value estimate implies 1.4 times the 2023 book value and represents 23% upside. Unlike its Singaporean banking rival DBS, whose second-quarter earnings came out a day earlier and surprised the market to the upside, OCBC’s results were in line with expectations overall or perhaps a tad soft. The reason for the slight softness in the quarter was annualized credit costs of 35 basis points of loans, higher than OCBC’s full-year guidance of 20 basis points, as the bank added general provisions to bring its coverage levels up.

We maintain our narrow moat rating and fair value estimate of SGD 16 for Oversea-Chinese Banking, after its first-quarter earnings. Annualized return on equity, or ROE, was 14.7%, well above our full-year forecast of 12.6% (which we are now raising to 13.5%), mainly due to some unexpected firmness in net interest margin, down only 1 basis point from the prior quarter to 2.30%, compared with OCBC’s previous guidance for full-year NIM to be around 2.10%. OCBC lifted that guidance and now sees NIM around 2.20%; our new full-year assumption is 2.22%.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. It has expanded in the past two decades through a series of acquisitions and we think it could do further M&A in Asia in coming years in banking, insurance, or wealth management. OCBC’s private-bank division, Bank of Singapore, was established by the acquisition of ING’s private bank when ING exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. OCBC's bancassurance business was built on the gradual acquisition of Singapore-based insurer Great Eastern. In Indonesia, the bank raised its stake in PT Bank NISP to 85% from 23%, and bought Wing Hang Bank in Hong Kong in 2014 as a platform to expand its presence in Greater China, on top of its 20% stake in affiliate Bank of Ningbo purchased in 2006.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

We maintain our narrow-moat rating on Oversea-Chinese Banking Corporation, or OCBC, and lower our fair value estimate to SGD 16.0 from SGD 17.5 after fourth-quarter earnings and upon change of coverage analyst. Our new fair value estimate is equivalent to 1.40 times book value at the end of 2022 and represents 26% upside to the current share price, a similar amount of upside as exists to our fair value estimate for rival United Overseas Bank, or UOB, and a bit more than the 19% upside we see for rival DBS. Our fair values for UOB and DBS are equivalent to 1.57 times book value for UOB and 1.86 times for DBS, reflecting differences in our assumptions for the midcycle ROE of each bank. We put OCBC's midcycle ROE at 12.7%, compared with around 13% for UOB and around 16% for DBS.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. It has expanded in the past two decades through a series of acquisitions and we think it could do further M&A in Asia in coming years in banking, insurance, or wealth management. OCBC’s private-bank division, Bank of Singapore, was established by the acquisition of ING’s private bank when ING exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. OCBC's bancassurance business was built on the gradual acquisition of Singapore-based insurer Great Eastern. In Indonesia, the bank raised its stake in PT Bank NISP to 85% from 23%, and bought Wing Hang Bank in Hong Kong in 2014 as a platform to expand its presence in Greater China, on top of its 20% stake in affiliate Bank of Ningbo purchased in 2006.

Oversea-Chinese Banking Corporation’s, or OCBC's, third-quarter result was above our expectation with net profit increasing 31% year on year to SGD 1.6 billion, or 8% against last quarter. While net interest margin was a positive surprise similar to peers DBS Group and UOB, OCBC’s net interest margin of 35 basis points against the second quarter, to 2.06%, was the largest between the three banks. Higher asset yields were the main driver while the bank noted that a repositioning of its deposit book to focus on cash management accounts for SMEs and corporates also contributed. These cash management accounts are mainly current and savings deposits, which attract lower deposit costs relative to fixed deposits. Overall current and savings accounts declined as a percentage of total deposits, as deposits continue to migrate to higher-yielding accounts. This is in line with peers, and all three banks expect deposit costs to pick up in the fourth quarter and into 2023. We maintain our view on net interest margin in 2023 for all three banks to be above that in 2022. Our net interest margin assumption is revised higher to 1.87%, from 1.67% in 2022, to factor in the higher-than-expected net interest margin expansion. Quarter-on-quarter loan growth of 2% was also above our peers, while an operating expense increase of 1% against last quarter was also a positive. Our fair value estimate increases to SGD 17.50 from SGD 16 per share. This is mainly driven by higher net interest income, offset by lower fee income and higher operating expense growth assumption.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. While OCBC was on an acquisition trail over the past two decades, we expect new acquisitions to be strategic bolt-ons going forward. The bank is targeting acquisitions in the banking, insurance, and wealth management segments. Prudent valuation, a focus on forming partnerships, and seeking targets with similar cultures are key considerations. Previous acquisitions expanded the bank's geographical presence and strengthened its capabilities. The bank’s private bank division, Bank of Singapore, was established by the acquisition of ING’s private bank as the latter exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. Its bancassurance business was built on the gradual acquisition of Great Eastern. In Indonesia, the bank raised its stake in PT Bank NIP to 85% from 23%, and the most recent acquisition of Wing Hang Bank in Hong Kong provides a good platform and currency base to expand its presence in Greater China. The bank took a 20% stake in the Bank of Ningbo in 2006 and maintains operational relationship.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. While OCBC was on an acquisition trail over the past two decades, we expect new acquisitions to be strategic bolt-ons going forward. The bank is targeting acquisitions in the banking, insurance, and wealth management segments. Prudent valuation, a focus on forming partnerships, and seeking targets with similar cultures are key considerations. Previous acquisitions expanded the bank's geographical presence and strengthened its capabilities. The bank’s private bank division, Bank of Singapore, was established by the acquisition of ING’s private bank as the latter exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. Its bancassurance business was built on the gradual acquisition of Great Eastern. In Indonesia, the bank raised its stake in PT Bank NIP to 85% from 23%, and the most recent acquisition of Wing Hang Bank in Hong Kong provides a good platform and currency base to expand its presence in Greater China. The bank took a 20% stake in the Bank of Ningbo in 2006 and maintains operational relationship.

OCBC reported a strong second-quarter result with the key positive being a sharp increase in net interest margin, underpinning a 13% quarter-on-quarter increase in net interest income. Loan growth of 1% was also supportive of net interest income growth. Overall net profit in the second quarter increased by 9% to SGD 1.48 billion. Asset quality improved as nonperforming loans/total loans declined to 1.3% from 1.4% last quarter, mainly due to recovery and upgrades in Malaysia and Indonesia. Positively, new nonperforming asset formation was also slower than last quarter. We adjusted our forecasts to factor in slower fee growth and weaker loan growth of 5%, offset by operating expense increasing at a slower pace. Our fair value estimate of SGD 16 per share is unchanged. While the common equity Tier 1 ratio of 14.9% remains above the bank’s comfort level of 12.5%-13.5% and continues to be a drag on the bank’s return on equity, a slight decrease in the ratio was due to higher risk weighted assets from loan growth, reflecting a utilization of capital for growth. The excess capital does provide room for further dividend growth in the second half, in our view. The first-half dividend of SGD 0.28 per share was up from SGD 0.25 from last year and our full-year dividend forecast is increased slightly to SGD 0.59.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. While OCBC was on an acquisition trail over the past two decades, we expect new acquisitions to be strategic bolt-ons going forward. The bank is targeting acquisitions in the banking, insurance, and wealth management segments. Prudent valuation, a focus on forming partnerships, and seeking targets with similar cultures are key considerations. Previous acquisitions expanded the bank's geographical presence and strengthened its capabilities. The bank’s private bank division, Bank of Singapore, was established by the acquisition of ING’s private bank as the latter exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. Its bancassurance business was built on the gradual acquisition of Great Eastern. In Indonesia, the bank raised its stake in PT Bank NIP to 85% from 23%, and the most recent acquisition of Wing Hang Bank in Hong Kong provides a good platform and currency base to expand its presence in Greater China. The bank took a 20% stake in the Bank of Ningbo in 2006 and maintains operational relationship.

The three Singapore banks reported solid first-quarter results with the trends generally consistent across the three banks. As expected, the results were weaker against the same period last year, mainly due to lower net fee and commission income as capital markets were much stronger in 2021. First-quarter net profit was 30% higher for DBS Group against last quarter at SGD 1.8 billion, Oversea-Chinese Banking's, or OCBC’s, net profit was up close to 40% to SGD 1.4 billion while United Overseas Bank's, or UOB’s, result was 11% weaker at SGD 906 million. In our view, DBS’ result was relatively better than peers UOB and OCBC with the former posting higher loan growth and net interest margin improvement. Trading income was also stronger quarter on quarter. For UOB and OCBC, there were one-offs in their respective results with UOB’s noninterest income lower on mark-to-market losses while OCBC’s result benefited from lower expected credit loss of 6 basis point on total loans. The latter was due to a larger expected credit loss booked in the fourth quarter last year.

While Oversea-Chinese Banking Corp’s fourth-quarter and full-year 2021 results were in line with our expectation, the lack of any capital management initiative, in our view, disappointed, and the bank continues to retain a high level of capital. Our fair value estimate is increased to SGD 16 from SGD 14.20 as we revise our net interest margin higher in the medium term and for net interest margin to increase one year earlier in 2022. Management guided net interest margin to be in the range of 1.50% to 1.55% and sensitivity of a 4.5-basis-point increase in net interest margin, for a 25-basis-point parallel upward shift in the yield curve. We expect net interest margin to increase by a total of 30 basis point over the explicit forecast period, compared with 12 basis point earlier. Our forecasts assume net interest margin to be at the high end of management guidance at 1.55% with full impact on the interest rate increase in 2022 to flow through in 2023, resulting in net interest margin of 1.70%.

Oversea-Chinese Banking Corporation, or OCBC, is a long-established bank and one of the three largest banks in Singapore. While OCBC was on an acquisition trail over the past two decades, we expect new acquisitions to be strategic bolt-ons going forward. The bank is targeting acquisitions in the banking, insurance, and wealth management segments. Prudent valuation, a focus on forming partnerships, and seeking targets with similar cultures are key considerations. Previous acquisitions expanded the bank's geographical presence and strengthened its capabilities. The bank’s private bank division, Bank of Singapore, was established by the acquisition of ING’s private bank as the latter exited the Asia region following the global financial crisis. The operation's scale was increased by bolting on Barclays' wealth-management arm in Singapore and Hong Kong and, later, National Australia Bank's wealth-management business. Its bancassurance business was built on the gradual acquisition of Great Eastern. In Indonesia, the bank raised its stake in PT Bank NIP to 85% from 23%, and the most recent acquisition of Wing Hang Bank in Hong Kong provides a good platform and currency base to expand its presence in Greater China. The bank took a 20% stake in the Bank of Ningbo in 2006 and maintains operational relationship.