On 7 April 2016, local bank OCBC announced the acquisition of Barclays Asia wealth management business in Singapore and Hong Kong through its private banking arm, Bank of Singapore for $430 million. The transaction is still subject to approval by Singapore’s High Court but is expected to be completed by end of this year. Nevertheless, investors have given their nod of approvals and pushed the share price up by $0.60 within the past week.
Since last year, OCBC’s share performance had not been doing well partly because of its loan exposure to the oil and gas industry. The non-performing loan (NPL) has increased to $1.97 billion in FY15 from $1.28 billion the previous year, due to the “classification of a few large corporate accounts associated with the oil and gas services sector”. As a result, the share price had tumbled from $10.89 in 2015 to a low of $7.46 in February 2016. So the recent share performance must have given OCBC investors something to cheer about.
Smart traders who bought OCBC shares at $7.46 this year would be sitting on massive paper gains by now. Personally, I knew a wealth builder who invested $70,000 at that price range. I guess he must be laughing all the way to the bank now, if he decided to cash in.
To put things into perspective, there is nothing that OCBC can do about the current oil crisis. The only feasible mitigating measure is for the bank to limit its exposure to companies in the oil and gas sector and to exercise disciplined risk management on the loans disbursed to companies in this affected sector. However, in doing so, this will not grow the company. In the banking world, there is a need to scale in order to capture market share, especially in a small and crowded market like Singapore. What OCBC is doing now is to increase its investment moats to compete with local lenders like UOB and DBS.
The key reason for investors’ positive reaction to this acquisition is because most people view this acquisition as complimentary fit for OCBC. This is because Barclays Asia wealth management has a base of more than 1,800 clients with total asset under management of US$18.3 billion as at 31 December 2015 in Singapore and Greater China. With this acquisition, OCBC’s wealth management business will be significantly scaled up and its position in the private banking sector will be enhanced.
In my point of view, this is definitely a good piece of business as compared to OCBC’s acquisition of Hong Kong’s family-owned Wing Hang Bank back in 2014. OCBC splashed out a staggering $6.23 billion and left many investors wondering whether the Singapore lender overpaid for it.
Thankfully, the management of OCBC managed to execute the integration of Wing Hang into the group successfully. As of FY15, OCBC Wing Hang’s full year earnings contribution to the Group of HK$1.73 billion (S$307 million) accounted for 8% of the Group’s net profit after tax. It is still early days and too premature to judge whether the Wing Hang acquisition was a correct move but in the meanwhile, investors should monitor this subsidiary’s performance because it might be a game-changer for OCBC.
In conclusion, the latest acquisition by OCBC made sense because of the need to increase its investment moat to fend off competition from UOB and DBS. This is essential for survival as Singapore market is too small to grow organically. The only way for OCBC to grow is through strategic take-overs and mergers. In the next few articles, I will cover more in-depth analysis on the financial aspects of OCBC. So stay tune and keep a look out!
SG Wealth Builder