Singapore Banks - OCBC Investment 2019-07-02: Next Milestone In Singapore’s Financial Liberalisation Journey

Singapore Banks | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Next Milestone In Singapore’s Financial Liberalisation Journey


Phased-in approach safeguards long term financial system stability

  • Applications for the licenses will open in August 2019, by which point more details on the eligibility and submission criteria will be provided. Broad details shared so far are as follows:

Up to two digital full bank (DFB) licenses...

  • Up to two digital full bank (DFB) licenses allowing a wide range of financial services and deposits from retail customers will be open for applications to players anchored in Singapore. The number of licenses will be capped to avoid fragmenting the small domestic retail banking market.

Permissible activities of the DFB license will be phased in, with controls to be put in place to minimise risks to depositors.

  • Licensees are expected to start off on a restricted basis before limits may be progressively eased. Business restrictions will also be in place for the first stage of restricted DFB so only simple credit and investment products can be offered. Complex investment products including structured notes, investment banking activities such as derivatives (other than risk management reasons) and proprietary trading are not allowed.

MAS will not allow “value-destructive” competition to gain market share - 

  • The application will be open to established companies headquartered locally and controlled by Singaporeans, and joint ventures between foreign-local companies. Eligible DFBs (or their parent companies) will need to demonstrate a track record of operations in their specific ecommerce or technology fields (applicants with no existing businesses will not be considered).

Up to three digital wholesale bank licenses...

  • Up to three digital wholesale bank licenses will also be issued, catering to only small and medium sized enterprises and other non-retail segments, helping to provide more financing options and benefit under-served segments. This will be a pilot scheme open to both local and foreign players.

Capital and liquidity requirements will be issued to ensure a level playing field.

  • Restricted digital bank will be subject to initial deposit caps of SGD50 million, individual depositor cap of SGD75,000 and will accept deposits from a smaller group of depositors (staff, related parties, selected customers and business partners). The minimum paid-up capital will be increased from an initial minimum SGD15 million (due to the limited scope of permissible activities) to SGD1.5 billion over time (similar to existing banks incorporated in Singapore), subject to the MAS’ assessment of its ability to manage risks and deliver on its value propositions.


Limited near-term impact for Singapore banks expected, given the sector’s continued investment plans to upgrade digital capabilities, regulators’ phased-in approach and controls for DFBs.

  • While the competitive landscape for Singapore banks may increase over the medium term in the retail payments space and the shift to more online transactions should pick up further over time as non-bank players enter the scene, we do not expect a meaningful impact for Singapore banks in the near term given preparations by the sector ahead of the potential disruption.
  • In our recent meetings with Singapore banks, it was clear that their management teams were conscious of the need to develop their digital capabilities to cater to customers’ demand for seamless transactions. To date, Singapore banks have upgraded and integrated their back-end systems, reviewed physical branches and streamlined processes to free up front line capacity so they can focus on sales-related tasks and on improving customer experiences.
  • Although IT budgets are generally not itemised, cost-to-income ratios for the sector are broadly similar at around 43-44%. This suggests that on an absolute basis, DBS should have a relatively higher spend on IT. DBS Group has already started digital-only banks in India and Indonesia, which provides online account opening, purchase of insurance and loans disbursements, with plans to extend to other markets. UOB has launched a digital bank in Thailand (TMRW app), which was reportedly well received by customers, and plans to replicate in other ASEAN markets.
  • Our constructive view on Singapore banks is maintained. We see limited near-term impact for Singapore banks, given the already high competition in the sector, the sector’s continued investment in digital efforts, regulators’ phased-in approach and strict controls for rolling out the DFBs. Over the medium term, the most likely disruptions for retail banking include the payments segment (e.g. credit cards, foreign exchange transactions/transfers etc). With retail competition already high and expected measures to limit excessive deposit competition, we believe that the addition of digital bank licenses are unlikely to add significantly to competitive pressures in the near term, despite their attraction as new alternatives for younger generation and more technology savvy customers. As these new digital banks will also be operating on a smaller capital base with various deposit restrictions and offering a narrower range of products at the start, the incumbents’ advantages - which include access to deposit funding - should be largely maintained.
  • We view the level playing field and strict requirements for DFBs positively in mitigating the potential impact on incumbents (which are likely to accelerate their digital efforts further and move more customers onto their digital platforms), safeguarding depositors and ensuring sustainability of the business models. A digital-only bank provides banking services online and through mobile/tablet applications. It also cuts out the need for physical branches, lowers operating costs and increases efficiencies by deploying technology to offer services using automated processes and real time updates. Opportunities are opening up for non-bank players with companies such as SINGTEL (SGX:Z74), Grab and Razer reportedly keen to assess the feasibility of the new digital licensing conditions and the potential for partnership tie-ups in order to expand beyond their traditional services into areas such as mobile payments.


Remain constructive on Singapore Banks

  • Our overall sector view on Singapore Banks remains constructive.
  • Singapore banks are maintaining their ROE targets for this year despite macro concerns and reiterated confidence in sustaining net interest margins in 2Q, supported by mortgage rates re-pricing and benign asset quality trends.
  • DBS continues to target 12.5% ROE this year and aims to bring its cost-income ratio down from current 43% towards 40% over time. UOB’s ROE target of close to 12% is also maintained, despite some pick up in competition for mortgages locally. See report: DBS Group - Confidence In Sustaining ROE; United Overseas Bank - Focusing On Core Franchise.
  • The general outlook next year is less clear at this point, depending on the future direction of interest rates and trajectory of trade negotiations.
  • 1H19 results reporting dates - DBS and UOB will release 1H results end July & early August respectively, further insights will be provided then.


Next milestone in Singapore’s financial liberalisation journey

  • Following the recent eight virtual bank licenses issued by the Hong Kong Monetary Authority (HKMA), MAS’ upcoming issuance of new digital bank licenses marks the next milestone in the liberalisation of Singapore’s financials sector which started in 1999, reflecting the push for industry and digital players to review how digitalisation can complement existing businesses.





OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-02
SGX Stock Analyst Report BUY MAINTAIN BUY 29.200 SAME 29.200
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000
BUY MAINTAIN BUY 29.400 SAME 29.400



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