SINGAPORE (July 4): DBS Group Holdings (DBS), Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) have enjoyed a decades-long dominance of the banking market in Singapore.

But a decision by the central bank to grant up to five digital bank licenses to non-bank players is about to shake up the market.

The Monetary Authority of Singapore (MAS) last week announced it will grant as many as two digital full-bank (DFB) licenses and up to three digital wholesale bank (DWB) licenses.

See: Singapore to offer up to five digital bank licences

The digital full banks will be allowed to provide financial services and take deposits from retail customers, while the digital wholesale banks will serve SMEs and other non-retail segments.

To help mitigate risks, MAS says the DFBs will be restricted and face certain limitations at the start.

Aggregate deposits will be capped at $50 million, while individual customers will only be allowed to deposit up to $75,000.

In addition, the restricted DFBs will only be allowed to offer simple credit and investment products.

The limitations will only be lifted when these restricted DFBs have met all relevant milestones and been assessed to pose no significant supervisory concerns.

Already, Vertex Ventures-backed cross-border payments startup Instarem has said it will apply for a digital bank license.

The city-state’s largest mobile network operator Singapore Telecommunications (Singtel) has also expressed an interest in putting its name into the hat, as have gaming hardware manufacturer Razer and ride-hailing startup Grab.

See: Grab eyes Singapore banking licence as regulator studies virtual banks

Some market watchers, however, say they see no cause for concern for the incumbent banks.

“Singapore banks are digital savvy and can compete effectively against new entrants due to their comprehensive omni-channel approach,” says Jonathan Koh, an analyst at UOB Kay Hian.

Koh notes that DBS, seen as an industry leader in digital transformation, invested some $937 million, or 7.1% of its total income, on internet technology last year.

Meanwhile, Koh says, UOB spent $414 million, or 4.5% of its total income, last year to boost its digital prowess. UOB also has plans to launch its digital bank, TMRW, in five Asean countries.

The way Koh sees it, the new digital banks will also lack a certain human touch.

“To maximise sales, banks must effectively combine digital and human channels to create a seamless omni-channel offering. Even for customers who favour banking through an app, face-to-face interactions are required for complex financial products,” he says.

On top of not having physical branches to facilitate this, Koh believes DFBs will also be restricted by their lack of automated teller machines (ATMs) or cash deposit machines (CDMs).

At the same time, he notes that DFBs will have to meet the minimum paid-up capital requirement of $1.5 billion, and have to comply with the same rules as incumbent banks, including risk-based capital and liquidity requirements.

“New entrants are subject to similar risk-based capital and liquidity requirements but do not have physical branches, nor access to ATMs and CDMs. We find requirements for DFB and DWB rather restrictive,” Koh says.

Meanwhile, customers are likely to be disappointed if they are hoping the advent of digital banking will be a repeat of when ride-hailing was first launched in Singapore, with Uber and Grab each dangling huge discounts in an effort to win market share.

“MAS believes that the banking systems need strong anchor players that are competitive and well-supervised, with interests closely aligned to growth and stability of the overall system,” Koh says. “MAS will not allow any bank, digital or otherwise, to engage in value-destructive competition to gain market share.”

Andrea Choong, an analyst for CGS-CIMB Research, too believes the new DFBs and DWBs are unlikely to threaten the incumbent banks – at least for now.

“We think that virtual banks are not likely to threaten the primary lending businesses of DBS, OCBC and UOB in the near term,” Choong said in a report late last month. “We believe that the banking pie is large enough to be shared, with various players serving different segments.”

UOB Kay Hian is maintaining its “overweight” stance on the Singapore banking sector, and keeping its “buy” calls DBS and OCBC, with target prices at $30.50 and $14.62, respectively.

As at 12pm on Thursday, shares in DBS are trading 1 cent down at $26.14, implying an estimated price-to-earnings (PE) ratio of 11.1 times and dividend yield of 4.6% for FY19F.

Meanwhile, shares in OCBC are trading 5 cents higher at $11.53, implying an estimated PE ratio of 10.5 times and dividend yield of 4.4% for FY19F.