Oversea-Chinese Banking Corp Limited (SGX: O39), or OCBC for short, is one of the three big banks in Singapore. The group offers a comprehensive range of banking services across an entire spectrum, including loans, deposits, investments and insurance.
Though there have been severe macroeconomic headwinds associated with the US-China trade war, the three Singapore banks have managed to post growth in revenue and profits. OCBC is no exception. Moving forward, though, the economic environment may start to deteriorate. However, even with the uncertain outlook there are still three growth catalysts that I feel are relevant for OCBC.
1. Net interest margins
The net interest margin (NIM) of a bank measures the difference between the interest rate charged on loans, versus the interest rate paid on deposits. In essence, this represents the “gross margin” for the bank as they earn revenue from lending money out to businesses and individuals, while their “cost of sales” is the interest rate they pay on this money.
OCBC has shown a healthy trend of increasing NIMs, with Q1 2018 NIM at 1.67% and Q1 2019 NIM at 1.76%, an increase of 0.09%. This implies that the bank is able to re-price its loans at higher rates while keeping its deposit rates fairly constant. As rates worldwide are tipped to rise further, NIMs could improve further and act as a strong catalyst for growth in net interest income for the bank.
2. Wealth management income
Wealth management is another division of OCBC and consists of fees earned from insurance, asset management, stockbroking, and private banking subsidiaries. Income from this division has increased by a healthy 26.7% year-on-year; hitting a high of S$921 million. Bank of Singapore’s (OCBC’s private banking arm) assets under management (AUM) has hit a new high of US$108 billion as of 31 March 2019.
With OCBC’s reputation and ability to continue attracting capital to Bank of Singapore, chances are high that AUM can continue to grow further, providing a further boost for OCBC.
3. Loan growth
The third catalyst for OCBC is its loan growth. The first quarter of 2019 saw a healthy +5% year-on-year increase in customer loans to S$259 billion. The growth came mainly from the “rest of the world” category (up 19% year-on-year), which excludes OCBC’s four key markets of Singapore, Malaysia, Indonesia, and China. While the trade tensions between the two biggest economic powers of the world may have impacted loan growth in China and Asia, OCBC has still managed to grow its loan book outside of Asia – an admirable feat.
Given the ongoing expansion of its loan book amid the trade issues, investors should have the confidence that OCBC can continue to grow this part of the business further.
Risks to be mindful of
Of course, the above scenarios may not play out if associated risks come to pass. NIM may not expand further if global interest rates stay stagnant. Bank of Singapore may see tepid growth in its AUM if competition increases among the banks for assets, while loan growth may stall if the trade war continues to send shock waves through the world.
Investors can be sanguine on the opportunities but should always be mindful of red flags that may indicate that the catalysts aren’t playing out and continue to monitor OCBC, as well as its operating, environment closely.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Oversea-Chinese Banking Corp Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.