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OCBC’s Wing Hang Bank Acquisition: Shrewd Or Screwed?
Tradeable, Tradeable Ideas | 16 May 2014
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By: Lim Si Jie
Articles (169) Profile
  1. OCBC posted record profit in its first quarter in FY 2014, a 29 percent jump as compared to a year ago.
  2. OCBC offer to acquire Wing Hang Bank would allow OCBC to gain a foothold in the Chinese economy and benefit from any upward growth in the Chinese economy.
  3. Various indicators signal that OCBC is likely to break the $9.80 resistance in the long run, although short term pullback is to be expected.

OCBC Q1 Results Post Record Quarterly Profit

OCBC Bank, Singapore’s second-largest bank by assets, posted record profit in the three months ended March 31. Net profit jumped 29 percent to $899 million as compared to the same period a year ago.

Overall income from its wealth-management activities such as insurance, private banking and asset management, rose to a quarterly record of $572 million (a rise of 10 percent compared to a year ago). Non-interest income, fees and commissions were also higher.

Solid asset growth and higher margins also helped to boost OCBC net interest income by 19 percent to $1.09 billion while customer loans rose 18 percent to $175 billion.

Loan demand is expected to continue enjoying growth of double-digit figure in the year ahead.

OCBC’s Business First Loan: Collateral Free Loan For Startups

OCBC’s net interest margin grew for the first time in 19 quarters to 1.70 percent from 1.64 percent. Signs of improved lending profitability have boosted confidence amongst OCBC management to unveil a first-of-its-kind collateral-free loan that provides startups as young as six months old with expedited access of up to $100,000 in loans.

The OCBC Business First Loan lets startups borrow funds in as quickly as a day while requiring them to complete only a one-page form and submit their latest notice of assessment from the tax department as well as bank statements.

Improvement in lending profitability will allow OCBC to overcome rising funding costs and declining credit demand amid slowing economic growth. Credit demand is weakening in Singapore’s economy, which grew an annualized 0.1 percent in the three months through March from the previous quarter.

With startups gaining popularity rapidly in Singapore, OCBC wants to tap into this growing pool of potential customers to gain more profits since lending margins is improving.

OCBC’s Offer To Acquire Wing Hang Bank

The Bank of New York Mellon Corp. is expected to sell its stake in Hong Kong-based Wing Hang Bank Ltd. to Oversea-Chinese Banking Corp. Ltd. The transaction is expected to close in the third quarter. OCBC offered to pay HK$125 per share in cash for 50.66 percent of Wing Hang Bank.

Wing Hang would give OCBC a network of about 70 branches spanning Hong Kong, Macau and mainland China.

Graphical representation of OCBC's sectors both business (left) and geographical (right).
Graphical representation of OCBC’s sectors both business (left) and geographical (right).

As seen from its Q1 results, Greater China currently represents 12 percent of OCBC’s profit before tax. OCBC sees this acquisition as a deal that would give them a much sought-after gateway to the Greater China region.

OCBC wants to tap growth in overseas markets and from fee-based businesses such as wealth management to counter weak lending margins and lower credit demand. In other words, OCBC is betting on China’s growth in the long run.

Pullback To Be Expected

A technical analysis of OCBC's chart
A technical analysis of OCBC’s chart

OCBC share price has been moving sideways since the beginning of the year between $9.09 (support) and $9.75 (resistance). A point to note is that MFI, Williams %R, RSI and stochastic are all trending upwards.

However, I am expecting a pullback to happen in the short term given that Williams %R and stochastic are in the overbought region.

OCBC Charging Ahead In The Long Run

I am thus positive about a bullish call on OCBC in the long run. But never forget the “Buy low, sell high” mantra. So let’s wait for the pullback and enter at a cheaper price. Point to note, don’t miss the opportunity by waiting too long.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Oversea-Chinese Banking Corp  11.080 -0.02 -0.18%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More

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