Oversea-Chinese Banking Corporation (OCBC) unveiled on July 3 its branding and strategy refresh, emphasising fund flows towards Asean from Greater China and a headline target of $3 billion in cumulative incremental revenue between 2023 and 2025.
The bank flew local media to its launch event and briefing in Hong Kong where it unveiled its new logo and earnings targets, which were last updated in 1998 and 2018 respectively.
At that time, the bank’s former chief executive Samuel Tsien had announced the bank’s aim to double profit before tax contributions from its business in China’s Greater Bay Area (GBA) to $1 billion by 2023. The GBA refers to the nine “megacities” of Guangdong province as well as China’s two special administrative regions of Hong Kong and Macau.
That profit target is now subsumed under the bank’s new revenue goal, says Helen Wong, OCBC’s group CEO since 2021. She pinned the blame on Covid-19 for slowing the development of the GBA. “I can always say there’s a number, but in a way, we are looking at the future. That original target will fold into what we want to do in these coming three years.”
However, what the bank wants to do exactly remains vague. For starters, incremental revenue refers to additional revenue from a given increase in sales. In OCBC’s context, this could mean higher sales of its wealth products or increased loans.
What would be the bank’s key revenue drivers? Analysts present attempted to parse OCBC’s seemingly abstract headline target into nuts and bolts.
See also: Unlocking the Asean premium
However, Wong demurs, citing the bank’s quarterly blackout period: “We do want to share this figure because we identified opportunities and we’re putting ourselves together to achieve it … Looking into three-year ROE and also returns [on assets], I want to leave that [to] when we discuss our first-half results. Would that be okay? We cannot go deep into it without showing you how the first-half numbers look.”
As a result, analysts from Citi Research and DBS Group Research have kept their views for now, until OCBC’s Aug 4 results briefing for the 1HFY2023 ended June.
Citi’s Tan Yong Hong remains “neutral” on the bank with a $12.50 target price while DBS’s Lim Rui Wen and Tabitha Foo reiterate “hold” at $13.
Granted, OCBC supplemented its $3 billion goal with a slew of hiring targets and customer figures, as well as its plan to invest more than $50 million over the next three years to build up transaction banking capabilities in Greater China.
OCBC aims to double its investment banking revenue in three years and achieve more than 500 regional mandates for cash management over the next five years.
The bank also aims to intensify its coverage of Hong Kong’s small businesses, targeting to onboard 26,000 new SMEs there over the next three years, which will add to its global wholesale banking customer base of 320,000 customers.
By 2025, OCBC aims to double the assets under management (AUM) of its premier banking and premier private client segments for Greater China.
OCBC expects to grow its pool of bankers in line with this regional push; the bank says it will double its number of relationship managers (RMs) serving high-net-worth customers in Greater China by 2025.
According to the bank, this is in line with its projections from 2021, when the bank said it would increase the number of corporate and commercial bankers by 30% to about 400 by 2024.
Bank of Singapore (BOS), OCBC’s private banking subsidiary, also aims to increase its AUM to US$145 billion ($195.32 billion) by end-2025, having tripled its AUM in the decade between 2013 and 2022 to US$124 billion today.
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To reach this new AUM target, BOS says it will grow its team of RMs from some 400 currently to 500 by then.
One analyst remarked that the RM hiring target “seems quite ambitious”.
BOS CEO Jason Moo acknowledges the “aggressive number” but is assured of the target. “We feel confident, through engaging experienced teams and potentially identifying good people in all three of our hubs — Singapore, Hong Kong and Dubai; we continue to be the bank of choice for some of them … Yes, there will be some kind of canvassing of the experience pool in the market. But we have three hubs and multiple locations that we can move people around as well.”
UBS’s takeover of Credit Suisse is “game-changing”, says Moo, and the behemoth is presenting “scale differences” and causing talent to reshuffle.
That said, the fallout is “actually very good” for Singapore, says Moo, who joined in March from Julius Baer. “It shines a light on the safe harbour that Singapore is for clients on a global basis, not just for Asia now… Amid geopolitical tensions around the world, Singapore remains a fairly neutral independent sovereign. So, I think we’re getting quite a bit of interest in Singapore as a jurisdiction, which benefits everybody in Singapore to be really honest. We anticipate, with [the] hiring of RMs, to be able to take advantage of that on a global basis.”
From left: Tan Wing Ming, acting head of Greater China, OCBC; Helen Wong, group chief executive officer, OCBC; Andrew Khoo, board chairman, OCBC Hong Kong; and Ivy Au-Yeung, chief executive officer, OCBC Hong Kong.
Asean-China ‘bumpy’ in near-term
OCBC’s plan to capture wealth flows from GBA is not without its detractors. OCBC’s economist and head of Greater China Research acknowledges the “near-term outlook is bumpy”.
In a July 3 note, Tommy Xie writes that “the lack of a growth fillip in 2023 and 2024 from China is already being reflected onto the Asean-5 countries” through a sluggish recovery in Chinese tourists and weak goods export growth towards China.
By contrast, goods export growth from the Asean region to China has shown “limited signs of a recovery”, adds Xie, suggesting that domestic private consumption and domestic demand remain soft.
Xie visited Beijing, Suzhou and Shanghai in mid-June, noting in a June 23 report that the atmosphere on the ground is “notably pessimistic”. “Onshore China observers I met also expressed caution. They acknowledged that China is currently grappling with declining confidence and expectations.”
Xie notes “a significant divergence” in the pace of recovery, with China’s private fixed asset investment falling 0.1% y-o-y in the first five months of 2023, marking the first annual decline since October 2020. “This negative growth in private investment signals a critical lack of confidence among private capital holders.”
Individuals and the private sector are losing the incentive to borrow money, instead focusing on repaying debt. Natixis Corporate and Investment Banking warns that Chinese banks will need to raise more capital as economic growth loses steam.
Analysts Alicia Garcia Herrero and Gary Ng write from Hong Kong that slower economic growth may bite asset quality, as Chinese banks face inadequate new loans to dilute rising bad debt.
“Chinese banks may face more pressure on asset quality if the balance sheet recession problem amplifies in the future and confidence does not pick up in 2023,” reads a June 30 report. “Small banks will face more challenges in asset quality and solvency emerging from real estate, while large banks will need to meet more stringent regulatory requirements.”
Novelty of reopening ‘wearing off’
However, none spotlights the GBA as clearly as a July 3 report by Standard Chartered and the Hong Kong Trade Development Council, released on the day of OCBC’s announcement.
The Standard Chartered GBA Business Confidence Index claims “business confidence” eased to the 50-point “neutral” mark in 2Q2023, from 51.3 the previous quarter and 39.5 in 4Q2022.
The novelty of reopening “was bound to wear off”, says Kelvin Lau, senior economist, Greater China at Standard Chartered. “However, the index did not fall back into contractionary territory, suggesting only a softening of the recovery momentum. Given that GBA is a microcosm of mainland China’s diverse economic drivers, making it a bellwether for overall growth, we see the mainland managing to stay on a modest recovery path.”
OCBC’s economist remains upbeat with the expectation of stimulus in 2H2023; Xie expects China to grow around 5.7% in 2023 before slowing to 5% in 2024.
OCBC’s head of global wholesale banking Tan Teck Long notes a “more cautious investment climate” among corporates in Asean, with geopolitical tensions and the experiences of Covid-19 placing further emphasis on supply chain resilience. “The China-plus-one (China+1) strategy and Asean have a lot to offer.”
The economic slowdown is “the big picture” but a closer look reveals “a story of two halves”, says Tan. “The first half, especially relating to the export sector, there’s [been] a general slowdown [and] electronics is in a cyclical downturn; I do acknowledge that.”
However, domestic-oriented sectors like tourism, accommodation and construction are “feeling pretty alright”, says Tan, as they catch up with Covid-19 delays. “Chinese tourists have not really gone to Asean en masse yet.”
High land and labour costs have pushed Chinese companies into countries that promise lower-cost production, adds Tan. “The big beneficiary is Vietnam.”
Meanwhile, Chinese companies seeking to diversify their supply chains have entered Penang in Malaysia and Batam in Indonesia, says Tan.
China’s electric vehicle (EV) exports have exceeded that of Japan “in the short, one to two years since they started exporting aggressively”, he says, adding that the EV supply chain and its related ecosystem have expanded into Indonesia, owing to its nickel reserves.
According to Tan, China’s EV supply chain is snaking into Malaysia as well.
However, Standard Chartered’s GBA survey seems to refute the magnitude of this migration. “Although there has been a lot of discussion about global supply chain shifts in the market, 91% of survey respondents said they have not moved any capacity overseas, and 87% reported no plans to do so for now.”
According to respondents, the biggest hurdles and concerns for relocating production capacity overseas are higher-than-expected production costs, poor labour quality and productivity and the lack of good or nearby suppliers.
Looking ahead, Wong says Greater China and Asean will be even more important on the world stage. “Covid-19 points to the fact that you do want to maintain close ties with your nearby neighbours, because when a crisis hits, perhaps if you have a good relationship, you’ll be able to find more resources and support from your neighbours rather than trying to bring goods and services [from] very far away.”
Vietnam, as China’s largest trade partner, was the earliest beneficiary of the China+1 strategy. According to Wong, trade between the two countries will only grow as Chinese companies expand their supply chains across the border, and Vietnam purchases manufacturing equipment from China to meet this production demand.
OCBC’s limited Asean footprint
Vietnam boasts a projected three-year expected growth CAGR of 11%, according to the International Monetary Fund’s April data.
Unfortunately, OCBC’s presence in Asean is limited to Malaysia and Indonesia. On the other hand, its presence in China, Hong Kong and Macau is growing.
OCBC may have to deepen its presence in Vietnam to capture this opportunity. It offers a full suite of insurance, wholesale banking and consumer/private banking capabilities in Singapore, Malaysia and Indonesia. But in Thailand and Vietnam, OCBC’s presence is limited to a wholesale banking branch in each country.
Additionally, group-wide data shows Asean contributing three-quarters of OCBC’s total income in 2022, with the bulk from Singapore. Vietnam’s almost non-existent contribution is subsumed under the rest of OCBC’s Asia-Pacific operations in its financial statements, as it is not among its four “core markets”: Singapore, Malaysia, Indonesia and Greater China.
How does OCBC plan to differentiate itself from its peers with its “Asean-Greater China focus”?
Responding to The Edge Singapore’s query, Wong points to OCBC’s standing in Malaysia and Indonesia, where it is among the top two foreign incorporated banks and top four privately-owned banks by total assets respectively, as of 2022.
Wong reiterates the bank’s “balanced presence” across Asean. “Vietnam and Thailand — we’ve been there for a long time; [it] also supplements our overall Asean proposition … We probably have a well-balanced presence among all these countries that make the Greater China-Asean link effective [and] powerful to serve our customers.”
Wong adds: “If you look at Singapore and if you look at our positioning in Hong Kong and China, where we continue to invest, I think we own a very balanced team and portfolio that allows us to help our customers as they want to go into these countries.”
Photos: OCBC
