One of the most important questions you need to ask yourself before you invest in the shares of any company is: How does the company make money? Doing so can help you get a better sense of the drivers and risks to a company’s revenue streams. As Oversea-Chinese Banking Corp Limited (SGX: O39) is one of the biggest companies in Singapore’s stock market – it has a market capitalisation of a hefty S$35.3 billion – I thought it’d be useful for many investors if I were to peel open its latest 2015 annual report and have a look at its…
One of the most important questions you need to ask yourself before you invest in the shares of any company is: How does the company make money?
Doing so can help you get a better sense of the drivers and risks to a company’s revenue streams.
As Oversea-Chinese Banking Corp Limited (SGX: O39) is one of the biggest companies in Singapore’s stock market – it has a market capitalisation of a hefty S$35.3 billion – I thought it’d be useful for many investors if I were to peel open its latest 2015 annual report and have a look at its different revenue sources.
Source: OCBC annual report
You can see that OCBC – Singapore’s second largest bank by assets – has many streams of revenue (a bank’s revenue is known as income).
The most important source of revenue for OCBC is its net interest income, which comes from the traditional banking business of borrowing and lending. It is heavily affected by the difference between the interest that the bank pays to borrow (from say, depositors and other financial institutions) and the interest it receives from loans it has extended.
These rates are, in turn, heavily affected by the prevailing interest rate environment. In general, a rising interest rate environment would be beneficial for the bank’s net interest income. And given that the bulk of OCBC’s total income comes from its net interest income, changes in the interest rate environment would be important to keep an eye on.
The other revenue streams are collectively termed as non-interest income. They stem from OCBC’s activities in other types of banking activities that are not part of borrowing and lending.
Meanwhile, OCBC also breaks down its revenue streams by business segments:
Source: OCBC annual report
You can see that the Global Corporate / Investment Banking segment makes up the majority of OCBC’s total income. Under this segment, OCBC serves institutional clients (large and small companies as well as governmental organisations). Some of the banking services provided include long-term project financing, short-term trade financing, and corporate finance advisory services.
Global Consumer / Private Banking is the next largest business segment and it is where OCBC provides banking products and services to individual customers. Most Singaporeans should be familiar with some of the segment’s offerings, such as deposit products (savings accounts for instance), credit cards, and personal and housing loans.
Third in the list is Insurance, and this comes mainly from OCBC’s 88% ownership of Great Eastern Holding Limited (SGX: G07), one of the oldest insurance companies in Singapore. Great Eastern’s main business is in life assurance and general insurance products.
OCBC Wing Hang also makes up a nice chunk of the bank’s total income of S$8.72 billion in 2015. OCBC Wing Hang comes from OCBC’s 2014 acquisition of the Hong Kong-based Wing Hang Bank. The aim of the purchase is to help OCBC gain a foothold in the Pearl River Delta region of China.
All told, there are plenty of moving parts to OCBC’s business, and that is why a breakdown of the bank’s revenue streams is important. It gives us a better sense of what to expect in the case of certain events happening in the financial world, such as a rise in interest rates.
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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 Chong Ser Jing does not own shares in any companies mentioned.