OCBC OVERSEA-CHINESE BANKING CORP O39.SI DBS GROUP HOLDINGS LTD D05.SI Banking – Singapore Adopting Best Practices In Tax Transparency
- Singapore banks are already FATCA-compliant and target to implement AEOI by 2018.
- Tax transparency is a global trend. There is no room for regulatory arbitrage, given that major financial centres, such as Switzerland, Luxembourg, United Arab Emirates and Hong Kong, as well as offshore havens, such as Bermuda, British Virgin Islands and Cayman Islands, have also endorsed AEOI.
WHAT’S NEW
FATCA is more draconian.
- The Foreign Account Tax Compliance Act (FATCA) is a US law that requires foreign (non-US) financial institutions (FFIs) to submit information on accounts held by US persons to the US Internal Revenue Service (IRS). The US government will impose a 30% withholding tax on gross payments made from the US for FFIs that fail to comply with FATCA’s reporting obligations. FATCA was enacted on 18 Mar 10 and is effective on payments made from 1 Jan 14.
- Singapore has entered into a FATCA inter-government agreement with the US effective 18 Mar 15 to help banks simplify their FATCA compliance procedures. Banks, insurance companies, investment managers and custodians need to conduct due diligence to identify accounts held by US persons, defined as US citizens, permanent residents and green card holders. Thereafter, they need to transmit information on these accounts on an annual basis to the Inland Revenue Authority of Singapore (IRAS), who in turn relays the information to IRS.
- Singapore has amended the Income Tax Act in 2013 to allow exchange of information with the US. The amendment allows IRAS to obtain information from banks without having to seek a court order.
Tax transparency has become a global trend.
- The Organisation of Economic Cooperation and Development (OECD) and G20 have developed a Common Reporting Standard (CRS) for Automatic Exchange of Information (AEOI). This is a global effort to deter and detect tax evasion. AEOI is modelled closely after FATCA.
- Singapore, along with 95 other jurisdictions, has committed to the Global Forum on Transparency and Exchange of Information for Tax Purposes to implement AEOI. Most countries target to implement AEOI on 1 Jan 17 with the first exchange of information conducted in 2018. Members of the Global Forum undergo peer reviews of their legal and regulatory framework and the implementation of AEOI in practice.
- Singapore would carry out AEOI on a bilateral basis with countries that have strong rule of law and the ability to ensure confidentiality of information exchanged. As such, Singapore will prioritise implementation of AEOI with the UK and France.
Indonesia planning its fourth tax amnesty.
- Indonesia plans to roll out a tax amnesty to expand its tax base. The proposed amnesty allows Indonesians to declare previously unreported assets and thereby benefit from a reduced income tax rate of 2-6%. President Joko Widodo has pledged to clamp down on tax evasion and to raise tax revenue by 30%. The Ministry of Finance estimated the tax amnesty would raise revenue of Rp60t (US$4.4b) in 2016. Parliament is expected to deliberate on the tax amnesty bill in 2H16. If approved, this would be the fourth tax amnesty since Indonesia’s independence in 1945.
- Tax amnesty is a controversial issue. It could whitewash criminals with ill-gotten gains. Tax evaders would be pardoned and are immune to criminal prosecution. There are also concerns that the tax amnesty would weaken the reach of anti-corruption agency Komisi Pemberantasan Korupsi (KPK).
- According to Luhut Panjaitan, Coordinating Minister for Political, Legal and Security Affairs, there is no obligation to repatriate funds back to Indonesia under the tax amnesty.
ACTION
Limited negative impact from tax transparency.
- The implementation of FATCA and AEOI would not unduly affect Singapore’s competitiveness as a wealth management hub. Tax transparency is a global trend that affects all financial centres simultaneously. There is no room for regulatory arbitrage, given that major financial centres, such as Switzerland, Luxembourg, United Arab Emirates and Hong Kong, as well as offshore havens, such as Bermuda, British Virgin Islands and Cayman Islands, have also endorsed AEOI.
- Singapore aims to be a vibrant wealth management hub and is uniquely positioned to benefit from wealth creation within Asia. Its attractiveness lies in its efficient legal system that protects private property rights. Nevertheless, compliance to FATCA and AEOI does impose additional costs to set up systems to administer the new reporting requirements.
Singapore is a responsible financial centre.
- Singapore is committed to combat cross border tax evasion. The Global Forum has peers reviewed and affirmed that Singapore’s exchange of information regime is in line with internationally agreed standard. In addition, Singapore has signed the Convention on Mutual Administrative Assistance in Tax Matters to expand its network of partners for tax cooperation.
DBS Group Holdings (BUY/S$15.57/Target: S$17.48)
- Efficiency from common platform. DBS’ wealth management business has three client segments: Private Bank (AUM > S$5m), Treasures Private Client (AUM S$1.5m- 5m) and Treasures (AUM S$200,000 to S$1.5m). It has an efficient cost-to-income ratio (CIR) of 60% due to utilisation of a common platform across the three client segments.
- DBS’ total AUM from wealth management grew 9% yoy to S$146b in 2015. About 30% of the AUM is derived from the Private Bank segment. Wealth management accounted for 24% of group fee income in 2015.
- Growth from bancassurance. The growth in wealth management is supported by its bancassurance partnership with ManuLife, which provides an initial upfront payment of US$1.2b (S$1.6b, income of S$106m per year amortised over 15 years).
- Our target price of S$17.48 is based on 2016F P/B of 1.06x, derived from the Gordon Growth Model (ROE: 8.3% or average of 2016-18F, COE: 7.8% and Growth: 0%).
Oversea-Chinese Banking Corp (BUY/S$9.15/Target: S$9.98)
- BOS standard bearer for private banking. OCBC has a separate private bank - Bank of Singapore (BOS). Based on financial performance in 2014, BOS generated fees of US$227m, representing 65% of total fees from wealth management. Wealth management accounted for 31% of group fee income as OCBC has other diversified sources of fees, such as loans related, trade & remittance, credit cards and fund management.
- OCBC’s total AUM from wealth management grew 8% yoy to US$55b in 2015.
- Our target price of S$9.98 is based on 2016F P/B of 1.19x, derived from the Gordon Growth Model (ROE: 9.3% or average of 2016-18F, COE: 7.8% and Growth: 0%).
United Overseas Bank (NOT RATED/S$18.88)
- Caters mainly to mass affluent. UOB’s wealth management business has three client segments: Private Banking (AUM > S$5m), Privileged Reserve (AUM S$2m-5m) and Privileged Banking (AUM S$350,000 to S$2m). Total AUM grew 6% yoy to S$85b in 2015.
- About 25% of wealth management AUM is derived from the Private Banking segment. Privileged Banking accounted for 60-70% of AUM.
SECTOR CATALYSTS
- Economic growth has slowed in both Southeast Asia and China.
- DBS is trading at 0.95x 2016F P/B (GFC: 0.67x) and OCBC at 1.09x 2016F P/B (GFC: 0.83x). Thus, downside is limited as valuations are near the trough levels of the GFC.
ASSUMPTION CHANGES
- We maintain our earnings forecasts for DBS and OCBC as we had toned down our expectations on contributions from wealth management due to volatilities in the financial markets.
RISKS
- Further economic slowdown and political risks in regional countries.
PEER COMPARISON
Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-24
UOB Kay Hian SGX Stock Analyst Report 9.98 Same 9.98
17.48 Same 17.48
