OCBC has seen a tripling of its Greater China earnings contribution over the last five years on the back of its US$5 billion Wing Hang acquisition in 2014, with the piping of OCBC’s regional network now channelling greater flows tied to the rise of the world’s second largest economy, said group chief executive officer Samuel Tsien.
Operating profit from OCBC’s Greater China franchise has jumped to S$1.63 billion in 2018, up from S$476 million in 2013 before Wing Hang was absorbed into the OCBC group, Mr Tsien told media and analysts in Hong Kong.
Post-acquisition – that is, between 2014 and 2018 – operating profit generated out of the area roughly doubled from S$831 million, translating to a compound annual growth rate (CAGR) of about 18 per cent to 19 per cent, he added.
Greater China will remain the second-largest market for OCBC after Singapore, with its pre-tax profit contribution in 2018 at 19 per cent, up from 6 per cent in 2013. By 2023, the Greater China contribution should range between 20 per cent and 25 per cent, said Mr Tsien.
To further diversify its earnings base, he said the banking group is expecting Indonesia’s earnings contribution to hit 8 per cent, up from 6 per cent, reflecting the strong domestic growth.
The larger contribution from Greater China on an enlarged profit pie also means that the contribution from Malaysia and Singapore has fallen to 70 per cent now from 85 per cent in 2013. Last year, Singapore’s contribution alone stood at 54 per cent.
As it is, the bank is on track to meet its 2023 target to hit S$1 billion in pre-tax profit from the Greater Bay area – a business cluster comprising Hong Kong, Macau, and several cities in Guangdong province – by running the franchise at a targeted CAGR of 11 per cent, Mr Tsien said.
With the Wing Hang acquisition, OCBC today banks all the blue-chip companies in Hong Kong, said Mr Tsien, with the lender also in the SME segment “much more forcefully than before”.
Having retained all Wing Hang’s customers post acquisition, the group noted that growth was at a faster clip between 2016 and 2018 versus the five-year CAGR to 2018, according to CEO of OCBC Wing Hang Na Wu Beng.
OCBC Wing Hang has snapped up new customers and market segments such as healthcare and logistics, with revenue growth from flows out of the Pearl River Delta area more than doubling in the first half of 2019, compared to a year ago, said head of corporate banking at OCBC, Wing Hang Johnny Wei. New SME customers at OCBC Wing Hang now comprise a mix of Hong Kong entities and Chinese firms setting up businesses in Hong Kong.
The SME focus translates to wealth flows, with just over half of the SMEs banking with OCBC Wing Hang then sewn up by the bank as wealth customers, said head of retail banking at OCBC Wing Hang, Eric Ong. To add, assets under management (AUMs) referred to OCBC’s private banking arm Bank of Singapore via the corporate banking unit was up five times.
Mr Tsien stressed that the franchise value was not only limited to Hong Kong , even though most of Wing Hang branches are rooted in Hong Kong. It reflects the bank’s scaled-up ability to channel flows across businesses and countries, with OCBC holding the largest South-east Asian presence of the top-four foreign banks in the Greater Bay Area.
“Had it (just) been for the domestic business, we would not have acquired Wing Hang,” he said.
This network effect can be seen from dissecting its numbers. Operating profit from its Greater China franchise, which is based on OCBC’s internal management reports, stood at S$1.6 billion in 2018. Based on where transactions are booked, the 2018 pre-tax profit of the Greater China business stood at about S$1 billion.
The difference of S$600 million effectively represents what banks define as the flow business, a key pursuit among regional players.
As an example, a Chinese company expanding its operations in Indonesia may choose to work with OCBC to capitalise on the regional network. The lending and deposits may be booked in Indonesia, but the flow comes from Greater China.
“That flow business will continue,” Mr Tsien said, referring generally to flows between Greater China and Asean, noting that the shift in supply chain amid the US-China trade tensions will come, albeit slowly. OCBC has also seen flows into smaller countries such as Myanmar, where the bank has a presence as well.
Of all of OCBC’s core markets, the non-performing loan ratio – a gauge of credit risk – from its Greater China business is the lowest.
While loan outstanding in its Greater China business accounts for 25 per cent of the banking group’s total loan book of S$63 billion, only some S$5 billion is related to loans for business activities within mainland China, said Mr Tsien, noting that the bank is not competitive in the Chinese domestic market.
“If you don’t know yourself and you strive to compete even though you are not very competitive, then you end up with adverse selection. We have been very prudent in our risk-taking.”
Another gain from the Wing Hang purchase has been the greater access to US dollar funding for the group which has doubled to S$91 billion between 2013 and 2018. The group’s USD loan-to-deposit ratio (LDR) has correspondingly shifted – from more than 100 per cent as at first quarter 2013, prior to the acquisition of Wing Hang, to about 76 per cent as at second quarter of 2019. Simply put, this means that OCBC has a more liquid and stable US dollar deposit base to provide dollar-denominated loans.
Over at Bank of Singapore, wealth flows from China and North Asia now accounts for 30 per cent of overall AUM, said Derrick Tan, CEO of Bank of Singapore’s Hong Kong branch. He aims to drive this contribution to 50 per cent, although he acknowledged that the bank has not secured a major share of wallet from Greater China clients yet.
Over the next five years, the China ultra-high-net-worth wealth business is estimated to grow at a CAGR of about 16 per cent, he said.
OCBC’s private banking arm which acquired Barclays’ wealth and investment business in Hong Kong and Singapore three years ago, could also be looking to further bulk up. According to Mr Tsien, in response to queries, the wealth manager is open to such “market opportunities”. He added: “We are always shown opportunities.”