DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Digital Banks - More Losers Than Winners
- A total of 21 applicants are vying for two DFB licences and three DWB licences. However, Singapore could prove to be a hard ground for digital-only banks as incumbent banks are IT savvy and have embarked on digital transformation since 2014.
- We see easing of geopolitical risks and stabilisation in interest rates as positive catalysts.
- We see banks as yield plays. We expect reviews in dividend policies to lead to higher dividends in 2020.
- Maintain OVERWEIGHT.
WHAT’S NEW
21 applicants vying for digital bank licences.
- The Monetary Authority of Singapore (MAS) has received 21 applications for digital bank licences, of which seven are for digital full bank (DFB) and 14 are for digital wholesale bank (DWB).
APPLICANTS FOR DIGITAL BANK LICENCES
| Applicants | Description |
|---|---|
| DIGITAL FULL BANK | |
| Grab-Singtel Consortium | Grab 60%. Singtel 40%. |
| Razer Youth Bank | Razer Fintech (60%), Sheng Siong Holdings, FWD, LinkSure Global, Insignia Ventures Partners and Carro. |
| Beyond | V3 (Ron Sim’s private investment vehicle), EZ Link, Far East Organisation, Heliconia Capital, MSIG Singapore and Singapore Business Federation. |
| Sea Group | SEA Group has three businesses: e-commerce marketplace Shopee, gaming developer Garena and financial services network SeaMoney. |
| DIGITAL WHOLESALE BANK | |
| ByteDance | ByteDance owns video sharing app TikTok. It is the world’s largest technology start-up valued at US$75b. |
| Ant Financial | Ant Financial is fintech associate company of Alibaba Group. |
| AMTD-led Consortium | AMTD (Hong Kong-based financial services group), Xiaomi Finance, SP Group and Funding Societies. |
| Sheng Ye-led Consortium | Sheng Ye Capital, Phillip Capital and Advance.AI. Sheng Ye and Advance.AI are backed by Temasek’s subsidiary Pavilion Capital. |
| iFAST-led Consortium | iFAST (wealth management platform), Yillion Group (operates one of four digital banks in China) and Hande Group (fintech founded by former President of WeBank). |
Successful applicants would be announced within six months.
- MAS will announce the successful applicants for two DFB and three DWB licences in Jun 20. Successful applicants are expected to commence business by mid-21.
Hong Kong – A harbinger.
- HKMA has awarded eight digital bank licences. ZA Bank was the first digital bank to commence trial in Dec 19. It offered promotional interest rate of up to 6.8% for 3-month fixed deposits of up to HK$100,000 for the first 2,000 customers (incumbents, such as BOC Hong Kong, HSBC and Standard Chartered, offer 1.9-2.3%). The trial is conducted to gather practical feedback to further improve its banking service platform before its full official business launch. WeLab Virtual Bank is expected to launch later this year.
Hong Kong’s citizens are accustomed to comprehensive services offered by global banks.
- New digital banks will find it difficult to break the dominance of credit cards and Octopus cards. They will also be competing against one another to gain consumers’ mindshare. While competition for deposits could heat up, it is uncertain if these new start-ups could carve out a niche for themselves.
ACTION
- We see manageable impact from digital-only banks:
- Traditional brick-and-mortar banks remain the preferred primary account for most consumers. According to McKinsey, digital banks account for about 5% of all retail customers in Western Europe and the US.
- Need two hands to clap. Banks must adopt an omni-channel approach to effectively engage customers digitally and through physical interactions. While 80% of all touchpoints occur digitally, only 25% of sales are closed through digital channels (20% online, 5% mobile). Face-to-face interactions are required for complex financial products.
- Singapore a hard ground for digital-only banks. Singapore banks are digitally savvy. They are prepared to meet increased competition, having embarked on digital transformation since 2014. DBS was recognised as the World’s Best Digital Bank by Euromoney twice in 2016 and 2018. UOB was recognised as the Best Digital Bank in Singapore and Thailand by Asiamoney in 2019.
Maintain OVERWEIGHT.
- Geopolitical risks from the escalation in trade conflict and hard Brexit are subsiding, which will lead to a gradual recovery in business confidence. A further fall in NIMs is arrested by the stabilisation in interest rates after three “insurance” cuts in the Fed funds rate. We expect NIMs to stabilise starting 2H20.
Banks are yield plays.
- DBS (SGX:D05) and OCBC (SGX:O39) provide attractive dividend yields of 4.6%, which differentiate them from regional peers. We see their dividend payout ratios as sustainable due to Singapore banks’ robust CET-1 CAR.
Upside for higher dividends.
- Our base case for DBS’ 2020F DPS is S$1.20 but we see potential upside to the best case of S$1.32. Assuming UOB (SGX:U11) achieves consensus estimate EPS of S$2.55, best case DPS for 2020F would be S$1.28 based on payout ratio of 50%. Thus, DBS’s and UOB’s 2020F dividend could potentially be higher at 5.0% and 4.8% respectively.
- See DBS Dividend History; OCBC Dividend History; UOB Dividend History.
SECTOR CATALYSTS
- Banks evolving into yield plays.
- Fear over massive cuts in interest rates has eased.
ASSUMPTION CHANGES
- We keep our earnings forecasts unchanged.
- See DBS Analyst Reports; OCBC Analyst Reports; UOB Analyst Reports.
RISKS
- Slower economic growth in Europe and China.
Jonathan Koh CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-01-17
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