OCBC: The World’s Strongest Bank with a Fortress Balance Sheet

This is a massive bank focused on the less sexy parts of finance, yet that is where its value lies. Oversea-Chinese Banking Corporation (OCBC) is Singapore’s second largest bank by assets (SG$225 billion). It is also the largest local bank in Singapore by market capitalization, but the smallest local bank by global presence. Accolades abound for OCBC:

·         Bloomberg has rated OCBC as the world’s strongest US$100 billion asset bank both in 2011 and 2012;

·         Global Finance 2012 has rated them among the World’s 50 Safest Banks;

·         Asian Banker 500 rated them Strongest Bank in Southeast Asia 2012;

OCBC's Fortress Balance Sheet

·         Most Innovative Bank in Asia-Pacific by Asia TrailBlazer Awards 2012;

·          FinanceAsia in 2012 awarded them as one of the top 10 companies in Singapore for Best Corporate Governance, Best Investor Relations, Most Committed to a Strong Dividend Policy, and Best Corporate Social Responsibility.

This is clearly a bank that takes risk management, innovation, transparency, shareholder value, and corporate governance seriously – all pluses this side of the 2008 financial crisis. With OCBC’s shares currently trading at SG$10.86 on the Singapore stock exchange within a 52 week range of SG$8.14-11.2 and with a one year return of 32%, now is a good time to buy for a long-term hold.

OCBC is one of the largest listed banks in the ASEAN region and has 20,000 employees globally. Founded in 1932 from the merger of three local banks (the oldest was founded in 1912), OCBC is the oldest existing Singapore bank. Globally, the bank has 530 branches in 15 countries/territories, including Singapore, Malaysia, Indonesia, China, Hong Kong, Vietnam, Brunei, Japan, Australia, UK, and USA. However 411 branches are located in Indonesia, 55 in Singapore, 44 in Malaysia, and 24 in China. Some interesting footnotes form their history include the fact that they were OCBC was one of only four foreign banks to have branches in China in the 1950s and has had a presence in China since 1925, and that they were the first local Singapore bank to begin consolidation in the local banking sector by acquiring Keppel Capital Holdings Ltd in 2001. Operating in 15 countries, OCBC’s Banking Services business include consumer banking services (deposits, mortgages, car loans, personal loans, credit cards, securities trading for individuals), business banking (comprehensive financial services for large corporate, financial institutions, government agencies and SMEs), investment banking (capital markets and mezzanine capital financing in Asia Pacific, syndicated lending, corporate finance in Asia Pacific, Islamic financing), transaction banking (cash management, trade finance, custody/nominee services), and global treasury (foreign exchange activities, money market operations, fixed income and derivatives trading, structured treasury products for hedging, Islamic Shariah-compliant products). Notable subsidiaries include OCBC Securities with membership of both the Singapore and Hong Kong exchanges; the insurance business Great Eastern Holdings with 4 million policyholders throughout Singapore, China, Indonesia, Vietnam and Brunei and the largest insurance group in Singapore and Malaysia by total assets and market share; the asset manager Lion Global Investors with total assets under management of SG$30 billion; the Bank of Singapore (formerly ING Asia Private Bank) offering wealth management services to high-net worth individuals across Asia from offices in Singapore, Hong Kong, Manila and Dubai; and the Singapore Island Bank which operates as an internet bank called finatiQ.

OCBC's Singapore Headquarters

In 2012, OCBC managed a net profit after tax of US$564 million, 16% less than in 2011 but largely due to benign factors including a smaller spread between loan and deposit rates (and subsequently lower net interest margin) and an increase in operating expenditure as OCBC invested in expanding outside Singapore. In fact, the three-month Sibor interest rate has declined from 3.5% before the financial crisis started in 2008 to 0.37% currently. The smaller margin between loan and deposit interest rates has been a challenge for Asian banks generally this year as the world’s major central banks, including the Bank of Japan and US Federal Reserve, kept their benchmark rates low and continued quantitative easing in an attempt to kick-start their economies. More positively, the decrease is despite the fact that OCBC’s volumes of loans issued actually increased by 3% in 2012 from the previous year as well as more positive market sentiment increasing brokerage fees from OCBC’s securities business and profit from their life insurance business (a growth area for Asia as a middle class develops).

OCBC have also been planning for the future in an effort to grow their market share. Their New Horizons III strategy of 2011, in the mould of a command economy’s five-year plan, is an effort to use a balanced scorecard approach in sculpting strategy. They are investing to expand its business into the ASEAN market nations, Hong Kong and mainland China as they see these markets have high economic growth potential as well as possessing a cultural affinity with Singapore. OCBC perceive an opportunity to expand its Islamic Banking and Takaful insurance in the Muslim-dominated Malaysia too. OCBC has also been building up its wealth management business, with assets under management in the business increasing by SG$11 billion from a year ago to SG$55 billion and now constituting one-third of OCBC’s total revenue. This emphasis on wealth management comes at a time of unprecedented growth in the number of new millionaires in Asia, with millionaires (defined as those with over US$2 million in assets) at US$28 trillion currently and expected to increase to US$48 trillion by 2017. Included in OCBC’s New Horizons III strategy is their aims to maintain their position as one of the top 3 corporate banks and wealth managers in the combined Singapore-Malaysia market as well as to mete out a reputation for product innovation by ensuring 15% of revenue derives from new products each year. OCBC also wish to maintain their position as Asia’s highest rated bank for its strong balance sheet and risk management (executed in accordance with Basel III requirements). Productivity is targeted as OCBC strive to be an efficient, low-cost banking service provider as well as cultivating diversity and cross-border management skill-sets in its staff to support overseas expansion efforts. Shareholder value is also essential in OCBC’s strategy as they aim to deliver 10% EPS growth annually, sustain ROE above 12%, target a minimum dividend payout of 45% of core earnings, return excess capital to shareholders via share buyback programmes, and divest non-core assets in order to invest the gains in core area growth opportunities.

A Sign of Asia's New Private Wealth

This is a great bank to invest in with strong risk management, innovation, and a focus on core corporate banking and wealth management activities. Its strengths are borne out in the multitude of accolades OCBC have accumulated including:

·         Best ASEAN SME Bank of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Best Private Wealth Management Bank, Southeast Asia 2012 from Alpha Southeast Asia;

·         Online Securities Platform of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Online Innovation of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Best Trade Solution in Southeast Asia 2011 – Alpha Southeast Asia Deal Awards;

·         Best Yuan Trade Settlement Solution in Southeast Asia 2011 – Alpha Southeast Deal Awards;

·         Best Project Finance for Real Estate 2010 – Asiamoney Deal Awards;

·         Best IPO Deal of the Year in Southeast Asia 2011 – Alpha Southeast Asia 5^th annual Deal & Solution Awards;

·         Ranked 1^st in Currency Products and Interest Rate Products for SGD, MYR, IDR (Vanilla Hedging/Structured Hedging Instruments) from Asia Risk Corporate Rankings 2010.