SingTel - DBS Research 2020-10-27: What Could A Digital Banking Licence Mean?

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SingTel - What Could A Digital Banking Licence Mean?

  • Grab-SingTel JV is a strong candidate for a full digital banking licence - to be awarded before end of 2020.
  • SingTel might have to commit over S$600m in total to the JV in long term.
  • Grab-SingTel JV has a potential to win 2%-4% share of the Singapore consumer market (excluding mortgages) in 5-years while achieving breakeven in 4-5 years.

Singapore digital banking licence

  • The Monetary Authority of Singapore (MAS) announced on 28 June 2019 that it would grant up to five digital bank (DB) licences. MAS will issue up to two digital full bank (DFB) licences to provide financial services and allow deposits to be taken from retail customers. Another three digital wholesale bank (DWB) licences may be issued, catering to small-and medium-sized enterprises (SMEs) and other non-retail segments in Singapore. Fourteen out of the 21 digital bank applications met the eligibility criteria stipulated by MAS and progressed to the next stage of assessment in June 2020.
  • The eligible applicants comprise five DFBs and nine digital DWBs.

3 key differences between Singapore’s DB licensing requirements and those of others in the Asia Pacific (APAC) region.

  1. DFBs in Singapore face the lowest initial paid-up capital threshold in the APAC region of US$10.7m (S$15m). At this point, individual deposits have a S$75k cap and aggregate deposits are capped at S$50m.
  2. Singapore is the only nation so far to segregate the licences to better address the targeted customer segments where DFBs will address all retail and non-retail customer segments while DWBs are only permitted to accept deposits from SMEs and other non-retail segments.
  3. MAS requires an applicant to submit its financial projection for the first five years of the proposed digital bank’s operations. The applicant should indicate when the proposed digital bank is expected to break even if it is not within the first five years. MAS may view favourably an applicant whose financial projection shows an earlier breakeven year. Thus far, other countries in the region have not stipulated profitability-based pre-conditions.

Rationale for Grab and Singtel to come together

  • The ride-hailer Grab and Singapore’s leading telco SingTel have applied for a digital full banking licence with 60/40% ownership. The target market should be the digital-first users and small-and medium-sized businesses which struggle to obtain funding. Products offered through this consortium are likely to seamlessly integrate into the daily lives of Grab’s and SingTel’s large, highly engaged customer base. SingTel has a subscriber base of 4.3m (as of June 2020) while Grab has over 187m users across Southeast Asia. Grab and SingTell’s consortium is expected to result in several synergies. Grab and SingTel have previously been part of several digital innovations and have launched fintech products such as Dash, GrabPay and GrabInsure.
  • Grab’s major advantage is the customer data it has acquired through its ride-hailing platform. Grab enjoys an 80% market share in ride-hailing in Singapore. Grab has extended beyond its core business, ride-hailing to digital financial services, food delivery and retail. Grab launched GrabPay wallet in 2016 and incorporated the Grab Financial Group in 2018 which built payment, lending and insurance solutions. This experience has enabled Grab to become well acquainted and understand the unbanked and underbanked segments’ requirements.
  • SingTel, being a Temasek-controlled entity and a trusted telecom player, should be able to build trust among its customers for taking bank deposits. SingTel is also investing in its digital business in areas such as cyber security which will add value to the digital banking arm.

Success stories of digital-only banks outside Singapore – Korean example is more relevant than Chinese one.

  • Chinese digital-only banks are often quoted example of success of digital-only banks. Four banks were provided digital banking licenses in China since 2014, namely, WeBank (Tencent), MYBank (Alibaba’s Ant Group), AiBank (Baidu), and XWBank (Chengdu Hongqi). The success of WeBank and MYBank has been phenomenal, since turning profitable one year into operations.
  • WeBank and MYBank leveraged on their huge user base and existing ecosystems including Alipay and WeChat Pay. However, this kind of success might be highly unlikely in the Singaporean context as local banks in Singapore are quite digitally savvy and to-be licensed digital-only banks do not have the user base of Alibaba and Tencent.
  • Kakao Bank is example of a profitable digital-only bank in a well-banked Asian country. Korea has similar demographics as Singapore and Kakao Bank was able to attract digital savvy customers. Since its launch in July 2017, it has increased its user base from 0.3m to 12.5m in July 2020 and in 1Q19, it achieved profitability.

Kakao bank secured 2.6% share of the consumer market (excluding mortages) in 3-years of its launch and achieved breakeven in 2-years.

  • According to our estimates, Kakao bank’s loan portfolio of KRW17.3tn in 2Q20 translates to ~2.6% of the South Korean consumer market excluding mortgages. Kakao bank achieved profit breakeven in 1Q19, secured 9.5% profit before tax margin in 1Q20 which rose to 13.3% in 2Q20.
  • One of the major factors which contributed to the success of Kakao Bank was the presence of an ‘everyday app’ in Kakao Talk which is used by 85% of the South Korean population while K Bank lacked such an application to gain better customer exposure.
  • Kakao Pay, owned by Kakao Bank was already a market leader in the South Korean e-wallet industry which was used by over half of the country’s population and Kakao Bank’s user experience (UX) and competitive pricing were major catalysts because only 1/10th of the overseas wire fee was charged compared to traditional banks and it takes only 7 minutes to open an account vs. 20-30 minutes at incumbents.
  • Furthermore, K Bank has a complicated shareholding structure and legal restrictions – 21 shareholders across several sectors making it difficult to raise capital. KT Corp, one of the leading investors, cannot invest more in K Bank due to an active ant-trust violation investigation.

Key factors for Grab and Singtel led consortium

  • We have identified three key parameters which would make the Grab and SingTel led consortium to achieve profitability in Singapore using the successful Kakao Bank as a proxy.
    • Userbase: Grab is the leading ride hailing platform in Singapore with an estimated market share of 80% while SingTel is the leading telco in the country with an estimated subscriber base of 4.3m. These vast userbase act as a major source for customer acquisition for the DFB.
    • Technology: Grab is a technology company with superapp aspirations offering ride hailing, payments, insurance, food delivery and hotel booking services. SingTel’s tech capabilities are not limited to digital channels, but further extends to analytics, Artificial Intelligence and machine learning. The telco also possesses deepened cyber security capabilities.
    • High frequency and real time data: Grab and SingTel possess large amount of high frequency real time data such as for payments and ride hailing in their digital platforms and the DFB could leverage on this to create reasonable and reliable internal credit model.

What could be Grab-Singtel’s game plan?

  • While no details have been disclosed publicly, we think that the consortium might target Grab drivers and partner Hawker centers & food partners for unsecured loans and credit solutions given vast amount of data lying with Grab and Grab Pay.
  • The consortium could target to acquire 4-5% of Grab’s user base in Singapore along with 20-40% of Grab partners in 3-5 years in our view. This could translate into 150K-200K customers for the consortium.
  • Interbank borrowings could be the main source source of funding due to the lack of adequate paid capital and deposits initially.

Grab-Singtel JV could be less successful than Kakao bank in Korea for three key reasons.

  • Firstly, Kakao Talk along with Kakao Pay are more entrenched as an everyday app compared to Grab and Grab Pay in our view.
  • Secondly, local banks in Singapore are more digitally advanced than local banks in South Korea.
  • Thirdly, Singapore is a more mature market with Singapore population being almost one-tenth of population of South Korea.
  • As such, Grab-SingTel consortium could take 5-years to achieve what Kakao Bank has achieved in 2.5-3 years.

A successful DFB will be able to grab a market share of 2%-4% in 5-years while it may achieve profit breakeven in 4-5 years.

  • Ceteris paribus, MAS expects DFBs to meet the minimum paid-up capital of S$1.5bn and become fully functional by the fifth year of operations3. Excluding mortgages, we project a successful DFB to secure 2%-4% market share of the consumer market in Singapore by FY25F. This is a reasonable assumption as Kakao bank achieved 2.5% share within 3-years of its launch.
  • Our back of the envelope numbers assume 10-20% profit before tax (PBT) margins (compared to 50%-plus PBT margins generated by local banks), supported by the fact that Kakao bank has 13.3% margins in 2Q20. Based on S$1.5bn minimum paid-up capital, it would translate into a return on equity (ROE) of 1%-3.5% comparable to the ROE achieved by Kakao bank.

A successful Digital Full Bank (DFB) is likely to be valued at ~S$1.5-3.0bn by FY25F.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-10-27
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