Will OCBC's latest China strategy drive more outperformance over DBS and UOB?

What happened?

OCBC's share price has been the best performing amongst the Singapore banks year-to-date. Based on its share price of S$12.37 at the market close on 14 July 2023, the stock has gained about 1% year-to-date. 

In contrast to OCBC’s slight gain, DBS’s share price is down about 6% year-to-date, while UOB's share price is down about 9% year-to-date as of 14 July 2023. 

OCBC recently shared its plans to tap on the ASEAN-Greater China opportunity and deliver an incremental cumulative revenue of S$3 billion over 2023 to 2025.  

To be able to achieve this, OCBC intends to invest more than S$50 million to build up its transaction banking capabilities in Greater China.

While there are limited details about the steps OCBC intends to take to bring about the revenue growth for now, we decided to examine if this could help to drive OCBC's continued share price outperformance compared to DBS and UOB. 

What you need to know about OCBC’s ASEAN-Greater China strategy 

#1 – Building up capabilities in Greater China

According to OCBC, it has around 4,500 staff across 67 branches in 17 cities in mainland China, Hong Kong SAR, Macau SAR and Taiwan.

In addition, OCBC has a partnership with the Bank of Ningbo which will allow both banks to tap on each other’s networks and platforms to serve customers in the region. 

To tap on tap on the ASEAN-Greater China opportunity, OCBC will be relying on a few key strategies.

In wholesale banking, OCBC will make further investments to build up its transaction banking capabilities in Greater China. It has already invested more than S$140 million over the past three years to build up its digital capabilities. 

OCBC is looking to increase its pool of bankers to drive this regional push, with the number of corporate and commercial bankers expected to increase by 30% to about 400 by 2024. 

This will help to complement OCBC’s close to 340 branches and offices in ASEAN, including in Singapore, Bruner, Indonesia, Malaysia, Myanmar, Philippines, Thailand and Vietnam. 

#2 – Targeting strong growth in wealth management

In its wealth management business, OCBC aims to double assets under management (AUM) of its Premier Banking and Premier Private Client (PPC)  in Greater China.

To be able to achieve this, it intends to double the number of relationship managers serving higher net-worth customers in these segments in Greater China by 2025. 

The management of OCBC believes that this will help to drive growth in the asset under management, which has already increased by 3.5 times from 2013 to 2022. 

This growth trajectory is also expected for Bank of Singapore, OCBC’s private banking subsidiary. Management targets to increase the AUM of Bank of Singapore to US$145 billion by end 2025, and will grow its team of relationship managers to 500 to achieve this. 

#3 – Awaiting further details in its upcoming results in August

OCBC will share more details about how the incremental revenue of S$3 billion is expected to be derived in its upcoming 1H23 results in August 

This could also greater clarity on how the incremental revenue would impact its returns.

In the meantime, investors are likely to focus on the bank’s asset quality and net interest margins.

As a recap, OCBC’s asset quality remains healthy in the first quarter of 2023, with non-performing loans ratio at just 1.1%.

However, what investors have been more worried about is the slight decline in net interest margin (NIM) in the first quarter to 2.30% from 2.31% in the previous quarter. 

With the Fed close to reaching the end of its interest rate hikes, concerns that there might be greater pressure on the NIM of OCBC has weighed on its share price. 

What would Beansprout do?

OCBC currently trades at a Price-to-Book (P/B) valuation of 1.0x, slightly lower than UOB at 1.06x, even though both banks have a similar return on equity of about 11%. 

OCBC management has shared that the dividend payout ratio would be “at least” 50%. This is supported by its very strong capital ratios, with a CET1 ratio of 15.9% as of March 2023.

As a result, OCBC is expected to offer a dividend yield of 6.6% in FY23E based on consensus estimates. This is higher than the expected dividend yield of DBS and UOB. 

This might make OCBC appear more attractive compared to DBS and UOB for investors who are looking at holding the Singapore banks for their dividend yield. 

Singapore banks’ share price performance has been lacklustre so far this year. Learn more about what to look out for DBS and UOB next. 

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