Singapore Banks - Maybank Kim Eng 2020-12-06: Let’s Get Digital

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11) SINGTEL (SGX:Z74)

Singapore Banks - Let’s Get Digital

We believe access to deep & quality data, synergies from already established ecosystems plus financial strength of the parents seem to have been the critical selection criteria for the four winners of the digital banking (DB) licenses.
In the medium term, we do not expect any material impact to the domestic banks – who already have comprehensive digital offerings. But these digital players could catalyse the broadening of financial sector.
For incumbents, we are more concerned about weakening asset quality, resurging COVID-19 & dividend caps, limiting returns.

We prefer SingTel (SGX:Z74) – which offers a proxy to digital banking expansion together with improving volumes and margins from rising ARPUs and 5G.

MAS has awarded digital full bank (DFB) licenses to Grab-Singtel and Sea Ltd, while wholesale banking (DWB) to Ant Group and a consortium of Chinese GLCs & a supply chain funding provider. See media release. MAS may grant more DWB licenses later – similar to a precedent set by HKMA who approved licenses in stages.
As we discuss in our detailed digital banking report Singapore Banks - Maybank Kim Eng 2020-01-07: Data Is King – success of digital banks could be determined by the depth, quality and access to data. We believe this has been a chief selection criterion for the 14 applicants together with balance sheet strength, particularly to navigate COVID-19 uncertainty.

The primary target for the digital banks is the underbanked in Singapore – low-income individuals, early income millennials, startups and micro-SMEs. Performing credit checks, KYC (know your customer), and monitoring large volumes of low yielding, higher risk accounts is a weak business case for incumbent banks. But digital banks should be able to substantially lower acquisition and transaction costs by automating these processes.
Taking into account MAS cautious virtual bank framework, we estimate digital banks could command 1.2% of S$ loan market share within 3-years – which is not substantial.
We do not expect deposit price competition, but there may be some customer leakage for incumbents as the digital banks ramp up cross-promotions leveraging synergies of their existing platforms. Subsequent maximising of returns from these customers should depend on the innovation, differentiation and depth of products introduced, we believe.

We expect domestic bank NPLs to rise to 2.1% in 2021E – the highest level since the Global Financial Crisis. Regional economies recovering at different speeds, a resurgence of COVID-19 and dividend caps further increases uncertainty. The recent strength of the re-rating of these banks offers an opportunity to profit-take. See recent report: Singapore Banks - Maybank Kim Eng 2020-11-24: Too Fast, Too Furious. Downgrade DBS OCBC UOB To SELL..
We believe SingTel (SGX:Z74) (BUY, Target Price: S$2.88) offers a better proxy for digital banking execution as well as ARPU recovery and 5G. See recent report: SingTel - Maybank Kim Eng 2020-11-30: Flu Recovery?

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-12-06

SGX Stock Analyst Report SELL MAINTAIN SELL 24.630 SAME 24.630

SELL MAINTAIN SELL 9.290 SAME 9.290

SELL MAINTAIN SELL 21.240 SAME 21.240

BUY MAINTAIN BUY 2.880 SAME 2.880