Morningstar | Narrow-Moat-Rated OCBC Returns to the Best Ideas List
We are adding Oversea-Chinese Banking Corporation, or OCBC, to our Best Ideas List. The narrow-moat-rated bank is trading at a 15% discount to our fair value estimate of SGD 13.60, as the bank’s share price declined in line with wider emerging markets. A forecast dividend yield of 3.9% is also attractive. While trade concerns will likely result in slower loan growth for the bank, we believe this is priced in. Our forecast assumes mid-single-digit loan growth in the medium term. We expect net interest margin to benefit from rising interest rates as stronger economic conditions continue in the U.S. The higher U.S. interest rate should translate into higher interbank rates in Singapore, and in turn, flow through to higher NIM for the bank. The bank derives the majority of its funding from deposits and maintains a 17% market share in Singapore dollar deposits, supporting its cost advantage and narrow economic moat rating. This should see the bank’s funding cost increase at a slower pace as assets are repriced more immediately.We also like the bank’s sizable wealth management operation. Assets under management totaled SGD 105 billion and is the eighth-largest in Asia against private banks in Asia-Pacific. According to Capgemini, the number of high net wealth individuals and their assets grew 12% and 15%, respectively, and this is expected to continue. We expect both to underpin fee income growth for the bank in the medium term. Both themes were evident in the last quarterly result. Net interest margin rose by 5 basis points to 1.72% in the quarter as its mortgage book was repriced higher while assets under management were up 3% on last quarter to USD 105 billion. The latter would be stronger if mark-to-market impact from lower asset prices were excluded.
Our assumption factors in rising nonperforming assets in the medium term, despite the extraordinarily low credit cost for banks in the region. We do not see rising nonperforming assets as an issue given the bank’s prudent track underwriting track record. A well-capitalised balance sheet with a common equity Tier 1 ratio at 13.6% is supportive of growth.
Oversea-Chinese Banking is engaged in the in the business of banking, life assurance, general insurance, asset management, investment holding and stockbroking. Co.'s segments include: Global Consumer Financial Services, which provides deposit products, consumer loans, credit cards and wealth management products; Global Corporate Banking, which provides long-term loans, short-term credit, deposit accounts and fee-based services such as cash management and custodian services; Global Treasury, which is engaged in foreign exchange activities, money market operations, fixed income, as well as structured treasury products; and Insurance, which provides both life and general insurance products.
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