Banking – Singapore - UOB Kay Hian 2019-07-01: Promoting Fintech By Issuing Digital Bank Licenses

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DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Banking – Singapore - Promoting Fintech By Issuing Digital Bank Licenses

• MAS will issue up to five new digital bank licences to non-bank players (two DFBs and three DWBs). Singapore banks are digital savvy and can compete effectively against new entrants due to their comprehensive omni-channel approach. 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.
• Maintain OVERWEIGHT.

WHAT’S NEW

• The Monetary Authority of Singapore (MAS) will issue up to five new digital bank licences to non-bank players, comprising:
  1. Up to two digital full bank (DFB) licences to provide financial services and take deposits from retail customers; and
  2. Up to three digital wholesale bank (DWB) licences to serve SMEs and other non-retail segments.
• Applicants for DFB licences must be headquartered in Singapore and controlled by Singaporeans (Singaporeans are largest shareholders and have management control). Foreign companies have to form JVs with a Singapore company. Application for DWB licences is open to all companies. To be eligible, applicants must have:
  1. track record in technology or e-commerce fields,
  2. serve unmet or underserved needs; and
  3. demonstrate sustainability of digital banking business model.
• The MAS has devised a two-stage process to minimise risks to retail depositors. Initially as restricted DFBs, aggregate deposits are capped at S$50m while an individual’s deposits is capped at S$75,000, and the bank can only offer simple credit and investment products. Restricted DFBs will graduate to become functioning DFBs with all deposit caps lifted, once the bank has met all relevant milestones and is assessed to pose no significant supervisory concerns. MAS did not prescribe a time period for restricted DFB to graduate to DFB.
• MAS will invite applications in Aug 19.

ACTION

• We expect Singapore banks to be able to compete effectively against DFBs due to:

Singapore banks have strong digital presence.

• DBS (SGX:D05) and UOB (SGX:U11) invested S$937m and S$414m respectively on IT in 2018, which represents 7.1% and 4.5% of total income. DBS is an industry leader in digital transformation. It was recognised as the World’s Best Digital Bank by Euromoney two times in 2016 and 2018.
• Customers like the UOB Mighty app due to its intuitive interface. UOB plans to launch digital bank TMRW in five ASEAN countries, starting with Thailand in 1Q19. According to Ernst & Young, seven out of 10 Singaporeans have made use of FinTech solutions in 2019, making Singapore a leader in the Asia Pacific region.

An omni-channel approach is required.

• 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.
• According to a study conducted by McKinsey, 60% of active banking customers use digital channels (online and mobile) and 80% of all customer touchpoints occur digitally. However, digital channels represent just 25% of sales (20% online, 5% mobile). Most sales, whether at the branches or over telephone conversations, still involve human interactions.

Paralysing restrictions.

• DFBs have no physical branches. They do not have access to automated teller machines (ATMs) or cash deposit machines (CDMs) as well.

Level playing field in terms of regulations.

• DFBs have to meet the minimum paid-up capital requirement of S$1.5b. They also have to comply with the same suite of prudential rules as incumbent banks, including risk-based capital (CET-1 CAR ≥ 9%) and liquidity requirements (LCR ≥ 100% and NSFR ≥ 100%).

Orderly competition.

• 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. MAS will not allow any bank, digital or otherwise, to engage in value-destructive competition to gain market share.

Case study – Hong Kong.

• Hong Kong Monetary Authority (HKMA) published its revised guidelines on virtual banks on 6 Feb 18. It awarded three banking licences to Livi VB (JV led by Bank of China (Hong Kong)), SC Digital Solutions (JV led by Standard Chartered Bank) and ZhongAn Virtual Finance. HKMA subsequently awarded another five banking licences.
• Hang Seng Bank, which adopts an omni-channel approach, gained 4.9% after the revised guidelines were published and another 1.6% after banking licences were awarded. Conversely, BOC (Hong Kong), which formed a JV for virtual bank, underperformed the Hang Seng Index during both periods.

SECTOR CATALYSTS

• Banks evolving into yield plays. OCBC (SGX:O39) has more room to raise dividend payout ratio.
• Banks benefits from single-digit loan growth and stable asset quality.

ASSUMPTION CHANGES

• We kept our earnings forecast unchanged.

RISKS

• Slower economic growth in Europe and China.
• Risks from hard Brexit.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-01

SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 SAME 30.500

BUY MAINTAIN BUY 14.620 SAME 14.620

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000