If you are an environmentalist, you would like Oversea-Chinese Banking Corp (OCBC) as it is light years ahead of other corporations in saving planet Earth. This is because OCBC O39 ’s environmental and sustainability efforts are bringing real benefits to the planet. However, OCBC is likely to be the most compelling of the three banks if they are looking for dividends in the short term.
For its 90th anniversary in 2022, OCBC gifted two mangrove projects to the community, one in Singapore and the other in Malaysia. These comprised planting 9,000 trees per project in two mangrove restoration projects — the OCBC Mangrove Park in Singapore on Pulau Ubin and another project in Tebuk Mendeleng, Selangor, Malaysia.
Mangrove soil is a highly effective carbon sink, locking away large quantities of carbon and stopping It from entering the atmosphere. Four times as much carbon can be trapped and stored in mangrove forests and their surrounding mudflats and soil than in comparable tropical forests.
“These trees will absorb more than 30 million kg of CO2 in their lifetime. Mangroves also provide natural infrastructure for greater biodiversity and protection against erosion and storm surges. OCBC has been expanding nature-based carbon storage solutions to help fight climate change,” says group CEO Helen Wong.
Increasing focus on China
In terms of business direction, OCBC is said to have the sharpest Greater China focus among the local banks. Hong Kong, China and Macau account for 24.6% of OCBC’s loan portfolio. However, Wong sees China as rescuing Southeast Asia’s GDP growth against slowing growth in developed markets.
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The focus on China, particularly in the Greater Bay Area, is set to continue despite deflationary economic signals. Wong believes the China+1 strategy will see Chinese state-owned enterprises establishing bases in Asean.
While interest rates and OCBC’s net interest margins (NIMs) may have peaked, Wong is looking to China for growth. “Hopefully, trade will increase as China opens up and the supply chain returns a bit more to normal,” she says. To date, China’s reopening has been underwhelming but there is still half a year to go.
“We call ourselves a leading Asian bank, with a network in the rest of the world, but predominantly in Asean and Greater China, and also reflects our franchise in banking, insurance and wealth,” she said during OCBC’s 1QFY2023 results briefing.
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Wong’s strategy, introduced during OCBC’s FY2021 results briefing, focuses on capturing Asian wealth in its Hong Kong and Singapore hubs, supporting Asean-Greater China trade and investment flows, unlocking value from New Economy and high-growth industries and driving the transition to a low-carbon world.
Of these, OCBC has managed to capture more net new money AUM, which in FY2022, was an additional $25 billion.
OCBC pivoted to wealth management following the acquisition of ING Asia Private Bank for the equivalent of $2.05 billion in 2009. At that time, the price represented 9.2% of AUM and 1.6x book value. The acquisition may look expensive compared to DBS Group Holdings’ acquisition of Societe Generale’s private banking business at just 1.75% of AUM.
Wealth management is attractive to banks because it generates fee income, requires low capital outlay and has a high ROE.
Despite OCBC and DBS D05 growing their AUMs to new highs, traditional net interest income (NII) still comprises the bulk of their total income, especially during FY2022 and 1QFY2023, when interest rates were rising.
OCBC’s NII rose from 65% of total income in FY2022 to almost 70% of total income in 1QFY2023. Wong believes that OCBC’s NIMs have peaked, and the residual impact of higher interest rates is likely to abate. “We do not have a lot of potential in repricing the loan book upwards, but funding costs will continue to catch up, which is a natural phenomenon in a rapidly rising interest rate environment. So NIM could be lower. We think it could be in the region of 2.1% to 2.2% this year,” she said during the 1QFY2023 results briefing in May.
The impact of rising interest rates in the past 18 months managed to eclipse the volatile impact of Great Eastern Holdings G07 (GEH). Before this year and with the implementation of IFRS and SFRS 17, GEH’s net profit incorporated mark-to-market gains and losses.
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From 1QFY2023, GEH’s mark-to-market impact will be reported in the Other Comprehensive Income statement under Fair Value through Other Comprehensive Income (FVOCI) rather than the profit and loss (P&L) statement. This would make GEH’s net profit profile a lot less volatile.
In terms of geographies, GEH entered China through a 50:50 joint venture in 2006 and divested its 25% stake in 2012. It currently still owns 25% of the venture.
With more or less an exit from China, GEH’s main geographies are Singapore and Malaysia, with a small presence in Indonesia. This is similar to OCBC’s Asean presence.
More interesting is the NorthBound Wealth Management Connect Service launched by OCBC Wing Hang China and OCBC Wing Hang Macau which could provide investment and asset allocation opportunities. In 2014, OCBC spent some $6.2 billion or 2x P/B to acquire Wing Hang Bank. In 2014, OCBC also increased its stake in the Bank of Ningbo to 20%.
On the sustainability front, OCBC’s sustainable financing commitment has reached $47 billion, which is close to the bank’s target of $50 billion by 2025. Wong says she is not making adjustments to this target.
Potential to raise dividends
Among the banks, OCBC has the best potential to significantly raise its dividends. As a policy, OCBC’s dividend payout ratio is 50% of net profits.
According to Citi, OCBC’s relatively higher CET-1 ratio of 15.9% and with management saying that the ideal target for its
CET-1 ratio is around 14%, suggest that some form of capital management is on the cards.
“OCBC might be keeping its powder dry for M&A opportunities. It has committed to a 50% payout ratio ... There is also a $4 billion to $5 billion reduction in risk-weighted assets (RWA) as part of ongoing RWA optimization, which raises the CET-1 ratio by a further 30 bps,” the Citi report says.
All three banks benefit from the Basel-IV transition by around 2 percentage points but the impact on capital is neutral once capital floors kick in. However, it appears increasingly that OCBC’s shareholders might reap an additional benefit from its potential for capital management.
