OCBC Wing Hang Bank

On 18 July 2016, OCBC announced the merger of its two banking subsidiaries in China – OCBC Bank (China) Limited and Wing Hang Bank (China) Limited) – to become OCBC Wing Hang Bank (China) Limited (“OCBC Wing Hang China”). After acquiring Wing Hang Bank in 2014, OCBC wasted no time in building its investment moat in China.

OCBC in China

China is a strategic core market for OCBC, given its sheer market size. OCBC Bank first established its presence in China in 1925 with the opening of its Xiamen branch and incorporated OCBC Bank (China) Limited, headquartered in Shanghai, on 1 August 2007. Thus, the merger of its Hong Kong Wing Hang Bank with the China’s unit makes sense because of the synergy in value.

Headquartered in Shanghai, the unified platform allows OCBC to be well-positioned to serve its clients better in the Greater China. OCBC Wing Hang China has 32 branches and subbranches span 14 major cities across both Northern and Southern China – Shanghai, Beijing, Shenzhen, Guangzhou, Zhuhai, Foshan, Huizhou, Xiamen, Tianjin, Chengdu, Chongqing, Qingdao, Shaoxing and Suzhou.

In the Pearl River Delta region in China, one of the country’s main hubs of economic growth, OCBC Wing Hang China has 13 branches and sub-branches, largest among the Singapore banks. With this sort of investment moat, OCBC will continue to be one of the world’s top 5 strongest banks (according to Bloomberg Markets).

For the latest quarterly report, OCBC revealed that 43% of its customer loans came from Singapore while 24% was from China. In years to come, the portion from China market is expected to grow because OCBC will be launching new initiatives that will enable the Group to increase market share in China and deepen their penetration.

1H16 saw OCBC’s net profit down 15% year-on-year due to lower contribution from its insurance unit, Great Eastern Holding (GEH). The performance of GEH weighed on OCBC’s profits as it constituted 11% of OCBC’s 1H16 proft before tax.  OCBC Wing Hang contributed 8% in the first half of this year.

My strategy for OCBC

I am not vested in OCBC but will enter this counter at the $6.00 level. The current share price of $8.55 does not justify its financial performance. Its profits from life insurance decline 19% year-on-year; fee income down 5% year-on-year; non-interest income down 16% year-on-year; net interest income down 2% year-on-year. In light of the current poor market conditions, OCBC also needs to increase allowances for loans to $52 million for 2Q16. Non-performing loans had crept to 1.1% on quarterly basis.

In my point of view, at current Price/Earning ration of 9.9 and Price/Book Value of 1, OCBC is not considered overvalued. But nevertheless, its substantial exposure to the Oil & Gas and Commodities sector creates a certain level of risk for the bank. Even though OCBC has a very diversified revenue across key geographies and businesses, it is unknown how long the current market condition will persist. Thus, there is room for OCBC’s share price to correct.

Fundamentally, OCBC is a strong company and when the stocks of a strong company sells near or below its intrinsic value, investors must act decisively. Currently, this is not the case for OCBC.

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Magically yours,

SG Wealth Builder