Could Singapore’s digital banks stoke competition over deposits? RHB Group Research analysts maintain “overweight” on the Singapore banking sector, noting that incumbents with strong current account savings account (CASA) deposits will fare better.
Digital banks are gathering at the starting line, having first received their licences in December 2020. According to RHB analysts, attractive savings account offerings may stoke concerns that deposit competition would intensify, exerting pressure on incumbent banks’ net interest margins (NIM).
While the recent increase in deposit rates will see some attrition in CASA deposits, NIM should expand over the next few quarters, bolstered by the sharp rise in interest rates since March, says RHB. “Banks with strong CASA deposits would also better withstand the rise in deposit rates,” write analysts in a Sept 22 note.
GXS Bank, the Grab-Singapore Telecommunications (Singtel) consortium that was awarded the digital full bank licence, launched a savings account at the end of August.
For now, this first product is offered to employees of Grab Holdings and Singtel, as well as selected customers in their ecosystem. A day after, Trust Bank — the digital bank established by Standard Chartered Bank and FairPrice Group — launched savings accounts and credit card offerings for retail customers.
Winners of the digital wholesale bank licences — Green Link Digital Bank and ANEXT Bank — had their soft launch in early June, with their products and services expected to be available later in the year. This leaves Maribank by SeaMoney as the only digital bank licence winner that has yet to announce its offerings.
Digital banks have a large appetite to grow deposits to support their loan- and fee-based offerings, says RHB. “To drive deposit accumulation, digital banks generally offer higher interest rates on savings accounts to attract new customers. This is made possible by their branchless operations and lower overhead costs. Hence, it is no surprise that Trust Bank and GXS Bank announced attractive offerings for their savings accounts. This would inevitably give rise to concerns that competition for deposits would intensify, with NIMs compressed by the upward pressure on funding costs.”
Incumbents with strong CASA deposits will fare better, says RHB. “Incumbent banks enjoyed meaningful NIM expansion in 2QFY2022 ended June as interest rates started to rise from March.”
While banks expect NIM to improve further given the rapid and sharp increase in US interest rates, they are cognisant that some of the margin improvement would be mitigated by the gradual upward repricing of deposits, write RHB analysts.
As it is, the US Fed on Sept 21 once again raised interest rates by 75 basis points.
The analysts add: “The industry-wide upward revision in deposit rates in August, we believe, will result in some attrition in CASA deposits as customers shift funds to the higher yielding fixed deposits (FD).”
Still, RHB believes the potential impact on incumbent banks’ funding costs will be manageable given their enlarged base of CASA deposits. “At end-2Q2022, CASA ratios stood at a high 72% for DBS, 61% for OCBC and 54.7% for UOB. The reported long queues at banks, despite the availability of online account opening and placement of FDs, also suggests that many depositors remain more comfortable placing their savings with a physical bank.”
RHB has a “buy” call out for preferred picks DBS and OCBC Bank, with target prices of $37.60 and $13.90 respectively. Meanwhile, RHB is “neutral” on UOB with a target price of $29.30.
As at 3.44pm, shares in DBS are trading 10 cents lower, or 0.3% down, at $33.43; while shares in OCBC are trading 8 cents lower, or 0.65% down, at $12.27; and shares in UOB are trading 28 cents lower, or 1.01% down, at $27.40.