OCBC Supports Environmental Destruction and Socially Irresponsible Business Actions

OCBC investment research's Carey Wong recently released a research note in response to the latest action by Nestle to terminate its direct palm oil purchases with Sinar Mas, which operates palm plantations through its Singapore listed subsidiary Golden Agri Resources. In her research note (signed off by head of research, Carmen Lee), Carey said:

Financial impact likely limited. While SMART did not reveal how much Nestle contributed to its sales, we understand that it is likely pretty insignificant at less than 0.5% of overall sales; this as the group sells most of its CPO to customers in China and India, where demand for CPO is expected to track the rapid urbanization in these countries. As such, the financial impact from the latest development, if any, will probably be very limited for GAR, although SMART may suffer some minor setback to its reputation. On that note, we believe that the adherence to guidelines laid out by RSPO (Roundtable for Sustainable Palm Oil) will become more important as the Nestle development suggests that businesses are paying more attention to “green practices”.

Maintain BUY with S$0.66 fair value. However, the push for full RSPO-certified CPO is still expected to be quite gradual; a Dow Jones report estimates that the total amount produced through sustainable methods is still quite small at 1.5m tons, as compared to the 45m tons of annual CPO output globally. As such, we continue to remain upbeat about GAR’s medium-term prospects and maintain our BUY rating and S$0.66 fair value.

Indeed, it is true that the direct contracts with Nestle constitute but a tiny fraction of Sinar Mas' overall sales and the immediate short-term financial impact is likely to be negligible.

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However, Carey has conveniently ignored the high probability of other customers and intermediaries cutting Sinar Mas from their value chains. Cargill and IOI, both major intermediaries and purchasers of palm oil from Sinar Mas, are coming under pressure from environmental groups and customers for not terminating their purchases from now notorious illegal deforester Sinar Mas. Indeed, Nestle itself is putting pressure on Cargill to ensure that Sinar Mas is eliminated completely from its value chain. IOI has also recently come under fire for its environmentally destructive practices in the development of Indonesian Palm Oil plantations. The chance of further financial impact is not insignificant.

In any case, whether or not Sinar Mas eventually suffers financially from its fracas, I find it distasteful and socially irresponsible for OCBC to promote a business that wilfully and illegally destroys high conservation value rainforest while claiming that it is a responsible member of the "Roundtable of Sustainable Palm Oil." Through the promotion of Golden Agri stock, OCBC shows that it is willing to turn a blind eye to environmentally destructive practices and corporate social hypocrisy, in the pursuit of profits.

And just a point of note - in a detailed comparative profitability analysis of the 5 SGX listed palm oil stocks, Golden Agri has come in last, by a mile.

Hence, how on earth can any analyst with a conscience consider Golden Agri to be a buy?

DBS, UOB & OCBC: A Comparative Snapshot

This research note is a brief comparative snapshot of the 1H07 performances of the three bank majors listed on the SGX.

Overview

As we can see in the table of comparative financials above, DBS is the largest of the three banks, with the greatest interest income, total income, and total assets of the three banks. OCBC, despite being a smaller bank, has a significant life insurance business in the form of its 87% stake in Great Eastern, and this boosts its non-interest income to comparable levels of both UOB and DBS. UOB is somewhere in the middle in terms of size between OCBC and DBS.

An interesting point of note is that while DBS and UOB both take charges profit while adjusting for allowances, OCBC actually takes an addition to profit from its allowances. This was a point of heated argument between Morgan Stanley Banking analyst Matthew Wilson (who like me is a Uni Melbourne graduate) and the CEO of OCBC, David Conner, during the latest results press conference.

Comparative Ratios

The table above lists some key performance ratios of the three firms, as well as the average of the three, as a comparative benchmark.

In terms of revenue mix OCBC clearly has the highest proportion of income coming from non-interest income. This can be attributed to the operations of Great Eastern which forms a significant portion of its balance sheet and income statement.

On the commercial banking side, we see that DBS is able to squeeze more out of its assets than the other two banks, and this manifests itself in the highest net interest margin of the three. DBS also has the lowest NPL ratio of the three banks.

OCBC has the lowest cost/income ratio of the three banks and DBS has the highest.

In terms of ROA and asset turnover, it would appear that UOB has the strongest position. UOB also has strong capital adequacy ratios. However its ROE is the lowest of the three.

Relative Valuation

Given that there is not much space left in Singapore to expand operations for the banks, the primary space for growth lies overseas, in the greater China region and the South East Asian region. Furthermore, there is intense competition in Singapore, with Citibank Sg recently mounting an aggressive campaign to grow its consumer business in Singapore. In greater China it would appear that all three banks have opened up operations, with DBS and UOB seeming to be the most aggressive in wanting to expand there.

In terms of non-interest income, DBS seems to be the most aggressive, and it has hired experienced investment bankers and appears to be trying to remodel the bank into a full-fledged universal bank. It will take some time for DBS to build up its capital markets network and capabilities.

Valuation wise there is not much to choose between the three. DBS and UOB are very similarly priced in terms of P/E and P/B. OCBC is priced slightly differently and this is probably due to its insurance assets.

An investment in the banks at current prices will therefore have to depend on the investors’ view of the recent turmoil in the credit markets and the broader economy, and the impact this will have on the banks going forward.