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OCBC’s multi-billion dollars stake in Great Eastern Holding

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In a month when DBS and SMRT hog the limelight, OCBC Bank quietly increased its multi-billion dollars stake in Great Eastern Holding. On 1st July 2016, OCBC made a filing in SGX to declare that it bought 611,800 shares of Great Eastern at $20.59 per share, effectively increasing its share in the insurer to 87.73% from 87.60%. OCBC’s multi-billion dollar stake in Great Eastern is actually one of its “hidden treasures”.

Great Eastern is the oldest life insurance group in Singapore and Malaysia, with over $60 billion in assets and 4.7 million policyholders. Being a subsidiary of OCBC, the life insurance group’s partnership is formidable. This is because Great Eastern’s life insurance products can be distributed through OCBC’s banking network. This type of partnership creates synergy and allows both companies to gain better customer’s insights and investment needs.

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Being the pioneer in bancassurance in 1992, OCBC is the only Singapore bank to have substantial stake in a life insurance company. UOB’s bancassurance partner is Prudential, while DBS’ bancassurance partner is Manulife. The fact that Great Eastern is a subsidiary of OCBC gives the bank the competitive edge because the business interests will have to be aligned. In fact, several OCBC’s management actually sit in Great Eastern ‘s board of directors.

Rated by Bloomberg Markets for being among the world’s five strongest banks for five consecutive years since the ranking’s inception in 2011, OCBC Bank is respected by many for its strong financial strength. Having an insurance company as one of its prized assets certainly strengthen OCBC’s investment moats and helps the bank to fend off competition from its rivals.

To put things in perspective, the entry barrier for establishing an insurance company in Singapore is extremely high due to the regulatory requirements, small market and stiff competition from the big boys. But if the reputation and market share are well established, the business model is generally considered very defensive.

Currently, Great Eastern share price is trading at $21.31, one of the most expensive stocks in SGX Mainboard. In fact, it is trading at a level much higher than its parent company – OCBC Bank. Obviously, the share price of Great Eastern has fallen from the peak of $25.85 since last year due to lower profits for first quarter of 2016, which has seen profits plunged by 56% compared to last year. Thus, it is likely that OCBC seized this opportunity to buy more Great Eastern shares on the cheap.

Insurance is one of the most profitable segments for OCBC Bank and it is unlikely that the bank will divest this asset anytime soon. The poor performance of Great Eastern in the first quarter of 2016 has certainly dented OCBC’s income. Operating profit of OCBC for its insurance segment in first quarter was $106 million, down from $234 million in last year. However, this segment remains one of OCBC’s top performing assets. The fact that OCBC bought more shares of Great Easten even when the latter delivered a poor performance shows that OCBC is taking a long term approach in Great Eastern Holding.

Many investors overlook the “hidden treasures” of OCBC and tend to underestimate its true value. The bank actually has multi-billion dollar worth of assets in commercial properties and a huge equity stake in Great Eastern Holding. For the record, the market capitalization of Great Eastern is $10.2 billion and therefore OCBC has about $8.94 billion worth of shares in the life insurance company.

As I do more research on OCBC, there is a feeling that this is a financial institute with a very complex portfolio to understand. Hence, the investment risk is higher for me. As indicated in my previous article, my strategy is still to stick with entry-level of $6.00 so as to give myself some safety buffer.

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Read my other articles on OCBC:

  1. OCBC Bank to rock the market with multi-billion hidden assets?
  2. Will EZRA sink OCBC share price?
  3. OCBC considering sale of United Engineers Ltd
  4. Is it a good time to invest in OCBC shares?
  5. OCBC Wing Hang Bank

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