Singapore Banks - Maybank Kim Eng 2017-09-18: Cashing In On Cashless Payments?

Singapore Banks - Maybank Kim Eng 2017-09-18: Cashing In On Cashless Payments? Singapore Banks Cashless Payments DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - Cashing In On Cashless Payments?

Could increase banks’ profits by 3-9% 

  • Various initiatives have been rolled out in Singapore to simplify epayments acceptance at merchants, such as unified point-of-sales terminals, and developing a common QR code by end-2017. 
  • Payment service providers (AliPay), ride-hailing platforms (Grab) and gaming company (Razer) have already or intend to roll out e-payments systems in Singapore. Should higher adoption of cashless payments increase cards usage, this will potentially benefit banks’ revenue. 
  • Our analysis focuses on impact on card fees if 40-70% of expenditure in Singapore shifts from cash to cashless payments. Using some broad assumptions, we estimate this could raise banks’ FY17-19 profits by 3-9%.
  • We maintain our estimates/Target Prices, and prefer UOB (BUY, TP SGD26.40) for its better pricing discipline and sensitivity to re-pricing intervals.

Banks earned 0.6-1.5% MDR & net interchange fee margin 

  • Most payment platforms adopted by retailers are currently linked to consumers’ cards and/or bank accounts. Based on Euromonitor data, local banks had a combined 66% share of card payment transactions in 2016. 
  • Our channel checks suggest that the bulk of banks’ cards fees come from merchant discount rates (MDR) and net interchange fees. 
  • If we assume 70-90% of banks’ card fees in Singapore are related to such fees, we estimate Singapore banks earned SGD77-388m in FY16. This would translate to 0.6-1.5% margin, with OCBC having a lower margin than peers. We think OCBC’s lower margin may be attributed to lower fees generated from MDR and/or higher interchange fees paid.

Scenario analysis 

  • Should 40-70% of total expenditure (~SGD70-123b) in Singapore shift from cash to cashless payments, we estimate the potential increase in card fees to be ~SGD421-1,964m, with Singapore banks to generate SGD60- 600m. 
  • Using 1.2% margin as our base-case scenario, we estimate the banks’ FY17-19E net profits could increase by ~3-9%.

Limitations to our analysis 

  • Limitations are:
    1. 40-70% of expenditure may not shift to cashless payments; and
    2. cashless payments will be backed by cards. 
  • This paper only look at cards’ fees but potential disruption in the payments space can have wider negative implications to banks. We do not know the shape and form of payment disruptions from emerging FinTech/ ecommerce competitors. 
  • Banks’ cards’ revenues may shrink should there be mass adoption of cashless payments through bank transfers/banking accounts, which usually do not incur additional charges for merchants and consumers.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-09-18
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 21.500 Same 21.500
HOLD Maintain HOLD 11.050 Same 11.050
BUY Maintain BUY 26.400 Same 26.400