Expanding Wealth Management And Sustainable Financing Will Drive Future Opportunities

Key Takeaways

• Strategic expansion in wealth management and insurance, along with sustainable financing, positions OCBC for significant revenue and profitability growth.
  
• Capital return initiatives and technology investments are aimed at enhancing shareholder returns, operational efficiencies, and sustainable long-term earnings growth.
  
• Diversification reliance and strategic challenges in interest margins and real estate threaten revenue, while tech investments risk escalating costs and efficiency shortfalls.

Catalysts

Provides financial services in Singapore, Malaysia, Indonesia, Greater China, rest of the Asia Pacific, and internationally.

• OCBC's strategic focus on expanding its wealth management and insurance businesses is expected to drive significant revenue growth, especially as wealth-related fee income and assets under management experience double-digit increases, impacting overall profitability.
  
• An anticipated increase in sustainable financing, with a notable 31% growth to SGD 50 billion in this portfolio, suggests future revenue growth as OCBC captures opportunities in high-growth and new economy sectors, enhancing net interest income.
  
• The bank's two-year capital return plan, including special dividends and share buybacks, reflects a strategic effort to improve shareholder returns and potential earnings per share growth, given the reduction in share count from buybacks.
  
• OCBC's active balance sheet management, which includes deploying liquidity into high-quality assets, aims to sustain net interest income even in a declining interest rate environment, potentially stabilizing or enhancing net margins.
  
• Continuous investment in technology and process improvements, along with plans to upskill the workforce, are expected to enhance operational efficiencies, which could improve net margins and contribute to sustainable long-term earnings growth.

Oversea-Chinese Banking Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oversea-Chinese Banking's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.0% today to 51.2% in 3 years time.
• Analysts expect earnings to reach SGD 8.2 billion (and earnings per share of SGD 1.83) by about March 2028, up from SGD 7.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the SG Banks industry at 10.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Oversea-Chinese Banking Future Earnings Per Share Growth

Risks

• The bank's reliance on noninterest income, particularly insurance income, may face risks as evidenced by the decline in income from Great Eastern due to changes in the medical insurance business in Singapore and Malaysia. This could impact overall revenue and earnings.
  
• The anticipated decline in net interest margin to around 2.0% in 2025, influenced by interest rate cuts and a strategy to deploy liquidity into lower-yielding, high-quality assets, indicates possible pressure on future net interest income and earnings.
  
• The Hong Kong commercial real estate (CRE) sector poses risks to asset quality, as suggested by the downgrade of a mid-cap CRE account. This could lead to increased non-performing loan (NPL) levels and higher credit costs, negatively affecting net margins.
  
• The competitive pressures in the Hong Kong and Mainland China markets, along with strategic shifts such as focusing on wealth management and potential exits, could hamper growth prospects and decrease revenue from these regions.
  
• Potential execution challenges related to technology investments and reliance on AI for growth could lead to higher operating costs in the short term, impacting the cost-to-income ratio and net margins if efficiency gains are not realized promptly.

Valuation

• The analysts have a consensus price target of SGD18.168 for Oversea-Chinese Banking based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD21.5, and the most bearish reporting a price target of just SGD15.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD16.0 billion, earnings will come to SGD8.2 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 7.0%.
• Given the current share price of SGD16.88, the analyst price target of SGD18.17 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.