SINGAPORE (Apr 16): CLSA is rating the Asean banking sector “overweight” as it is set to take a different route in the near future with fintech players carving out their paths and partnering the banks in more meaningful ways.
In a Wednesday report, managing director, HK and Singapore Banks of CLSA, Asheefa Sarangi says, “In our view, as a market, Singapore is best positioned from the banks’ perspective.”
This shifting landscape presents both opportunities and risks for banks, but those that are in a supportive environment will have an advantage, and IT-savvy banks with scale should come up as the biggest winners.
The research house’s top picks on the fintech shakeup theme are DBS and OCBC with “buy” recommendations and target prices of $35.50 and $15.75 respectively, as well as Indonesian-listed Mandiri with an “outperform” call and a target price of IDR8,700 (83 cents).
There are more than 600 fintech companies headquartered in Asean and this number has been growing exponentially over the past decade.
According the Sarangi, this is driven primarily by rapid tech adoption, infrastructure improvement, confidence in the stability and reliably of mobile technology, urbanisation, rising literacy, a greater pool of young people, the pull of the unbanked or underserved population and greater accessibility of capital for startups.
In Southeast Asia, fintech seems to be concentrated in payments and settlements, lending, as well as data analytics. These verticals are also where Asean banks look to be partnering.
“Some homegrown companies have the potential to survive as standalone entities, but most will need to partner with large domestic corporates to achieve scale and navigate around any licensing and regulatory barriers,” says Sarangi.
Within the banking industry in Asean, Sarangi believes that Singapore is the most mature, while Indonesia and the Philippines are relatively less developed in comparison.
Hence, more of the Singapore’s existing revenue streams could be at risk, while parts of a traditional banking lifecycle might never take hold in the other two markets.
However, Indonesia and the Philippines particularly appeal because smart penetration is remarkably high; there is a sizeable youthful population likely to engage in new services offered by fintech; and financial inclusion is relatively low.
Regulators and politicians in every market are taking action. Singapore appears to be relatively best placed, while the Philippines seems least well positioned.
As at 2.54pm, shares in DBS and OCBC are trading at $28.52 and $13.08 respectively.
DBS is trading at 12.7 times FY18 earnings with a dividend yield of 4.3%, while OCBC is trading 10.6 times FY18 earnings with a dividend yield of 3.8%.