DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Digital-Only Banks Are Coming
- The new digital bank licensees will keep Singapore banks on their toes to sharpen their digital capabilities. Singapore banks provide comprehensive services on an omni-channel basis, while new digital-only challenger banks are restricted to digital apps without face-to-face interactions. Moreover, other jurisdictions that have experimented with digital banks have not shown convincing results.
- BUY DBS (Target Price: S$26.75) and OCBC (Target Price: S$12.85) provide dividend yield of 4.2% and 5.1% for 2021F and 5% and 5.5% for 2022F.
- Maintain OVERWEIGHT.
4 new digital-only challenger banks instead of 5.
- MAS has announced 4 successful digital bank applicants instead of the originally planned 5 (2 Digital Full banks (DFB) and 3 Digital Wholesale Banks (DWB)).
- The 2 Digital Full banks (DFB) are:
- A consortium comprising Grab Holding and SingTel (SGX:Z74); and
- A wholly-owned entity of Sea Ltd.
- The 2 Digital Wholesale Banks (DWB) are:
- A consortium comprising Greenland Financial (subsidiary of state-owned real estate developer), Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management; and
- A wholly-owned entity of Ant Group.
- The new digital-only banks are expected to commence operations from early-22.
- The announcement of the successful candidates comes at a time when fintechs are under greater scrutiny after the suspension of Ant Group’s IPO. The new digital-only banks are expected to address unmet and underserved financial needs through innovative technology and contribute to growth of Singapore as a global financial centre.
Singapore is a hard ground for digital-only banks.
- Singapore banks are no stranger to competition. They face direct competition from many large foreign banks, such as Citibank, HSBC, Standard Chartered, BOC, CIMB and Maybank, and Singaporeans are well-served with a myriad of options for financial services.
- Singapore banks are IT savvy with strong digital capabilities. DBS was recognised as the World’s Best Digital Bank (2016 and 2018), while UOB was recognised as the Best Digital Bank in Singapore (2019) and Thailand (2019), and Most Innovative Digital Bank in Asia (2019).
Restrictions could hamper growth of new digital-only banks.
- The new licensees are digital-only banks and do not have any physical branches (only one physical place of business for face-to-face interactions with customers). DFBs are not allowed to operate automated teller machines (ATM)/cash deposit machines (CDMs) or join any existing ATM/CDM networks. Access to NETS electronic fund transfer at point-of-sale system is a commercial arrangement between DFBs and NETS (ie MAS will not interfere).
- On the other hand, Singapore banks engage customers on an omni-channel basis, interacting with them digitally and face-to-face at their branches.
Orderly competition and level playing field.
- 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.
- MAS will monitor market dynamics and will not tolerate any value-destructive behaviour. Thus, digital-only banks’ abilities to undercut pricing for loans and deposits are curtailed. MAS expects digital banks to be profitable on a standalone basis.
Banks to benefit from lower credit costs in 2021.
- DBS’s and OCBC’s total provisions for 3Q20 dropped 35% and 53% q-o-q respectively. DBS’s and OCBC’s credit costs for 3Q20 eased to 59bp and 52bp respectively, compared with 104bp and 105bp in 1H20.
- DBS has maintained guidance for cumulative credit costs in 2020-21 at 80-130p (S$3b- 5b), while that for OCBC is 100-130bp (S$2.5b-3.5b). For DBS, we estimate 2020 provisions at S$2.9b, and to drop to S$1.6b in 2021.
- OCBC is optimistic that credit costs for 2020-21 could gravitate toward the bottom-end of management’s guidance at 100bp. For OCBC, we estimate provisions at S$2.1b for 2020, and to drop to S$0.9b in 2021.
Uphill battle for digital-only challenger banks.
- The new digital bank licensees will keep Singapore banks on their toes to sharpen their digital capabilities. Singapore banks provide comprehensive services on an omni-channel basis, while new digital-only challenger banks are restricted to digital apps without face-to-face interactions. Moreover, other jurisdictions that have experimented with digital banks have not shown convincing results.
- Maintain OVERWEIGHT. BUY DBS (Target: S$26.75) and OCBC (Target: S$12.85).
DBS (SGX:D05) (BUY/ Target Price: S$26.75)
- Assuming MAS does not interfere with banks’ dividend policy, we expect DBS to provide dividend of S$1.08 for 2021 and S$1.32 for 2022, which represents dividend yield of 4.2% and 5.1% respectively.
- Our target price of S$26.75 is based on 1.27x 2021F P/B, derived from the Gordon growth model (GGM) (ROE: 9.1%, COE: 7.5% (beta: 1.1x), Growth: 1.5%).
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
OCBC (SGX:O39) (BUY/ Target Price: S$12.85)
- Assuming MAS does not interfere with banks’ dividend policy, we expect OCBC (SGX:O39) to provide dividend of S$0.50 for 2021 and S$0.56 for 2022, which represents dividend yield of 5% and 5.5% respectively.
- Our target price of S$12.85 is based on 1.14x 2021F P/B, derived from the GGM (ROE: 8.8%, COE: 7.75% (beta: 1.15x), Growth: 0.5%). We have utilised a higher beta of 1.15x s 1.1x (COE increased from 7.5% to 7.75%) and a lower terminal growth of 0.5% vs 1.0% previously.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Sector Catalysts
- Gradual recovery in earnings and dividends due to decline in credit costs in 2021 and 2022.
- Continued recovery of the Singapore economy accompanied by easing of safe distancing measures.
Assumption Changes
- We maintain our existing forecasts for earnings and dividends.
Risks
- Escalation of geopolitical tension and trade conflict between the US and China.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-12-07
SGX Stock
Analyst Report
26.750
SAME
26.750
12.85
DOWN
13.480
99998.000
SAME
99998.000
