OCBC Investment : Does This Bank Have It All? (Dividends, Growth & Undervalued?)

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Hi Investors

Summary

  • Phone scams impersonating bank
  • Slight decline in financials due to economic headwinds
  • Highest dividend yield for a Singapore Bank.
  • Leader of digital innovation
  • Growing regional business expansion

1. OCBC Ltd (O39.SI)

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Last Closed Price: $8.68
52 Week Low: $7.41

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Source: Yahoo Finance (Oct 5,2016)

2. What Business OCBC  Ltd (O39.SI) Is In

Oversea-Chinese Banking Corp is the oldest formed and longest established Singapore bank.

Primary business focus:

  • Retail & Commercial Banking
  • Wealth Management
  • Insurance

3. What Happened to OCBC Ltd (O39.SI) Recently?

Sharp Rise in Phone Scams Impersonating Bank

In July, many customers and the general public received phone calls from Mandarin-speaking scammers impersonating the bank. The call would be transferred to a person asking for the individual’s personal and banking information.

OCBC dealt with the situation well as they raised awareness by alerting the public of these scams through their website and other social media platforms. They have also taken action by training their frontline staff to be better prepared at handling enquiries relating to these scams from customers and the general public.

4. Financial Highlights

 

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Source: OCBC 2Q16 Report

OCBC reported a net profit after tax of $885M in 2Q16, 15% lower compared to $1.05B in 2Q15. This was due to a substantial gain from the sale of an equity investment under its insurance segment, Great Eastern Holdings in 2Q15.

Net interest income of $1.26B in 2Q16 declined 2% from $1.28B in 2Q15, while Non-interest income was down 16% from $939M to $788M.

Allowances for loans and other assets amounted to S$88 million, up from S$80 million a year ago. OCBC’s non-performing loans (“NPL”) ratio was 1.1% as at 30 June 2016, an increase from 0.7% a year ago.

 

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Global Consumer/Private Banking
Global Consumer Banking includes products and services such as deposits, loans, wealth management products and brokerage services. Private Banking caters to the needs of high net worth individuals by offering wealth management expertise.

Operating profit increased 3% to $273M in 2Q16 from $265M in 2Q15 due to income growth.

Global Corporate/Investment Banking
Global Corporate/Investment Banking serves institutional clients, providing a wide range of financing solutions, such as advisory services for Initial Public Offerings(IPOs) and mergers and acquisitions.

Operating profit declined 5% to $468M from $495B in 2Q15, mainly due to an increase in expenses which had offset higher net interest income.

Global Treasury and Markets Global
Treasury and Markets is responsible for the management of interest rate positions. They engage in foreign exchange, fixed income and derivatives trading, for investment and hedging purposes.

Operating profit increased by 13% to $89M, due to earnings from fixed income and derivatives trading.

Insurance
OCBC’s insurance business is carried out by Great Eastern Holdings Limited(GEH).

The insurance segment was 60% lower at $120M due to unrealised mark-to-market losses in GEH’s bond investment portfolio and increased allowances. This offset gains realised from the sale of an equity portfolio investment.

OCBC Wing Hang
OCBC Wing Hang offers a comprehensive range of commercial banking and related financial services such as consumer financing, share brokerage and insurance.

Operating profit by OCBC Wing Hang increased to $94M in 2Q16, a 1% increase from $93M.

4.1 Key Statistics

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Source: Shareinv

PE ratio of 9.3, compared to the industry’s average of 10.8 indicates that OCBC could potentially be under-valued.

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OCBC is currently the highest dividend bank stock in Singapore, with a dividend yield of 4.1.

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Source: OCBC Annual Report

Note that Return on Equity(ROE) declined to 10.4% in 2Q16, as compared with 13.4% a year ago and Earnings Per Share(EPS) declined to 84.9 cents in 2Q16, and was 103.9 cents the previous year.

5. Industry Overview
5.1 Market Trends

Economic Challenges

There have been concerns on the growth of China and the pace of the US Federal Reserve’s interest rate hike. There could also be potential financial distress in emerging economies and in the oil and commodity sector which could negatively impact financial flows and banking activities of the bank.

Rising Asian Wealth

The wealth of Asian countries in the region are gradually increasing. This would result in more people depositing more monies in the banking sector. OCBC will benefit from the increase in deposits as they would have more cash to loan out.

5.2 Key Risks

Credit Risks

Credit risks arises from the risk of loss of principal when the borrower defaults on the loan. OCBC is exposed to credit risks from lending to consumers and institutions. Trading activities such as the trading of derivatives, debt securities and foreign exchange also expose the bank to counterparty and credit risks.

However, the bank has taken measures to manage credit risks by providing regular risk reports to the Board of Directors so that timely actions can be taken in the event of any adverse credit trends.

6. Conclusion

The share price has been relatively flat since May this year. This was largely due to sentiments of uncertainty caused by economic headwinds.

However, I believe OCBC’s strong balance sheet, ample capital and adequate liquidity will tide the bank through those challenges and OCBC still has plenty of room for continuous growth due to the following reasons.

– Leader of digital innovation

  • OCBC was the 1st bank in Singapore to allow customers to transfer money directly through the ‘OCBC Pay Anyone’ mobile application to another bank account in Singapore.
  • OCBC launched the 1st mobile application called The ‘OCBC Open Account’ to offer deposit account openings through smartphones.
  • OCBC launched Singapore’s 1st personal financial management tool ‘OCBC Money Insights’ for online banking.

– Growing Regional Business Expansion

  • OCBC Securities: OCBC grew its market share of institutional businesses by more than 40%. Its futures and leveraged business grew more than 30% and revenue from foreign market trades increased by more than 40%. Furthermore, OCBC’s Indonesia’s branch continued to expand in areas such as equity sales recruitment, trading and risk management systems and growing it’s institutional business.
  • OCBC China: OCBC China has been progressively opening-up capital accounts in China as they have observed an increase in the number of Chinese clients expanding into Singapore, Malaysia and Indonesia. OCBC has also provided advisory services to several Chinese state-owned companies that invested in Indonesia.

Target Price: $7.97 – $9.11

My stand is to Buy. Although the banking sector is facing economic headwinds, I’m confident that OCBC will be able to tide through difficult times. You would also be able to collect dividends while waiting for the economy to recover.

If you want to learn more about how to find More Singapore Undervalue Stocks to invest, click on the picture below to join our Free Value Investing Masterclass.

cta

Geraint Liu

Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

 

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