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No near-term impact on incumbent banks following digital licence announcement: analysts

Jovi Ho
Jovi Ho • 5 min read
No near-term impact on incumbent banks following digital licence announcement: analysts
The primary target for the DBs is the underbanked in Singapore.
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The race is on for successful awardees of the digital banking licences in Singapore to begin operations in early-2022, with incumbent banks safe for now, say analysts.

As two of the largest names among the three brands involved in becoming digital full banks, Singtel and Sea will go head-to-head in the coming year as they prepare for the launch of their respective digital banking units.

However, Singtel offers a proxy to digital banking expansion together with improving volumes and margins from rising average revenue per user (ARPUs) and 5G, notes Maybank analyst Thilan Wickramasinghe. “We believe access to deep & quality data, synergies from already established ecosystems plus financial strength of the parents seem to have been the critical selection criteria for the four winners of the digital banking (DB) licenses.”

See: MAS awards digital bank licences to two consortiums, two entities

“In the medium term, we do not expect any material impact to the domestic banks – who already have comprehensive digital offerings. But these digital players could catalyse the broadening of financial sector. For incumbents, we are more concerned about weakening asset quality, resurging Covid-19 & dividend caps, limiting returns,” he adds in a Dec 6 note.

He is maintaining his “negative” rating on the banking sector here.

Last week, the Monetary Authority of Singapore (MAS) awarded digital full bank (DFB) licenses to Grab-Singtel and Sea Ltd, while wholesale banking (DWB) to Ant Group and a consortium of Chinese government-linked companies (GLCs) and a supply chain funding provider. MAS may grant more DWB licenses later.

The primary target for the DBs is the underbanked in Singapore, notes Wickramasinghe. These include low-income individuals, early income millennials, start-ups and micro-SMEs.

This is because performing credit checks, know-your-customer (KYC) checks and monitoring large volumes of low yielding, higher risk accounts is a weak business case for incumbent banks.

But DBs should be able to substantially lower acquisition and transaction costs by automating these processes, he notes.

“Taking into account MAS’ cautious virtual bank framework, we estimate DBs could command 1.2% of the Singapore dollar’s loan market share within three years – which is not substantial. We do not expect deposit price competition, but there may be some customer leakage for incumbents as the DBs ramp up cross-promotions leveraging synergies of their existing platforms. Subsequent maximising of returns from these customers should depend on the innovation, differentiation and depth of products introduced,” says Wickramasinghe.

On the incumbents, he expects domestic bank non-performing loans (NPLs) to rise to 2.1% in FY2021E – the highest level since the global financial crisis. “Regional economies recovering at different speeds, a resurgence of Covid-19 and dividend caps further increases uncertainty. The recent strength of the re-rating of these banks offers an opportunity to profit-take.”

Pressure points

While there is limited near-term impact on the incumbents, CGS-CIMB thinks pressure points will come in the form of stiffer deposit-taking competition. Analysts Lim Siew Khee and Andrea Choong point to an approximate 6.8% 3-month fixed deposit rates when digital banks commenced operations in Hong Kong this January.

They add in their Dec 5 note that incumbent banks will face mounting pressure on payment-related fees, including loss of interchange fees and float, but believe this to only be a longer-term prospect as operations ramp up.

Challenges that new digital banks will likely face are progressive technological upgrades of local banks, with DBS’s development of Digibank and UOB’s TMRW bank, and the stickiness factor of customers to these banks.

See also: Digital full bank licence to 'accelerate growth' of SeaMoney: DBS Group Research

For successful applicants Singtel, Grab and Sea, the DFB licence win represents an expansion into a potentially profitable business over the medium- to long-term, and a diversification away from its mature telco businesses, say Lim and Choong. The partnership with Grab allows both parties to leverage each other’s sizeable customer base and digital capabilities, they add.

“In terms of capital requirements, Singtel’s share (40% of consortium) may be a minimum of $600 million in three to five years. Assuming annual investment of $200 million per annum over three years, net debt/group earnings before interest, taxes, depreciation and amortisation (EBITDA) would only be slightly higher at 1.53x-1.56x at end-FY2023-2025F (we forecast 1.48x-1.50x) and hence unlikely to affect dividend paying capacity,” they state.

For Sea, margins may be pressured, note the analysts. SeaMoney is already an emerging e-wallet player, with 17.8 million quarterly paying users (QAU) transacting more than US$2.1 billion using the wallet services in 3QFY2020. “Leveraging its gaming and e-commerce ecosystem, we believe that Sea has a niche understanding of the needs of millennials and SMEs in the region. We believe that the DFB licence will allow SE to offer differentiated products targeting the unmet needs of these users, allowing it to further build up more revenue streams in its financial services segment. However, aggressive expansion into this segment may put pressure on margins for its digital financial services in the medium term.”

Meanwhile, CGS-CIMB analysts expect iFAST to de-rate on the back of its unsuccessful bid as market exuberance fades away. It remains in the running (part of PCCW’s consortium) to operate HK’s eMPF (Monetary Provident Fund) platform; award of the licence is likely by end-FY2020.

CGS-CIMB is recommending “add” on Sea and Singtel, with target prices of US$210.00 and $3.10 respectively, while recommending “hold” on iFAST with target price $3.41.

As at 11.13am, shares in Singtel are trading 5 cents lower, or 2.08% down, at $2.35; while shares in iFAST are trading 7 cents lower, or 2.32% down, at $2.95.

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