Is Oversea-Chinese Banking Corp Limited’s New Strategy in China a Smart Move for Its Shareholders?

Oversea-Chinese Banking Corp Limited  (SGX: O39), one of Singapore’s largest banks, currently has a small retail banking business in China with 17 branches.

While OCBC is solidly profitable in Singapore, its business in China hasn’t been doing well at all; in fact, the Chinese operations have been making losses for many years.

As a foreign bank in China, OCBC has had to face many challenges in getting approvals to open more branches in the giant Asian nation. Moreover, the landscape of retail banking there is so competitive, with China’s mega banks being the clear dominant force.

It’s under such a backdrop that OCBC is now re-evaluating its strategy in China. In particular, the bank is planning to switch its focus from retail banking to corporate banking in the country.

This seems like an interesting development, and with the acquisition of Hong Kong-based Wing Hang Bank late last year, OCBC’s strategy shift in China might be a great opportunity to find new avenues of growth in Asia’s largest economy.

The possible effects of the change in strategy

It’s logical for OCBC to pursue a new direction in China. For starters, it is nigh impossible for OCBC to compete in the retail banking market with many Chinese banks. In most countries, local banks hold dominant positions and it would be unwise for foreign parties to enter the fray and compete directly with the incumbents – China is no exception.

Corporate banking is a different story however. In comparison to retail banking, corporate banking (the provision of banking services to corporate clients) is much more profitable. While the cost of maintaining one corporate account would not differ too much from that of maintaining one retail client, the scope of business that the former can bring to a bank would be far higher than that of the latter.

With Wing Hang Bank’s client-base, OCBC would have a ready pool of prospects to tap into to start its corporate banking business in China.

Foolish Summary

I think this strategy shift is a welcome change for OCBC. If successful, the corporate banking opportunities in China might prove to be fertile soil to fuel growth for OCBC. At this stage, nothing concrete has been implemented yet, but it is surely an area worth watching for investors of OCBC.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.