Banking Sector - UOB Kay Hian 2021-01-15: Hong Kong’s Virtual Banks – The Harbinger

Banking Sector - UOB Kay Hian | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Banking Sector - Hong Kong’s Virtual Banks – The Harbinger

  • Both Hong Kong and Singapore are highly competitive financial centres with active participation by many global banks. If virtual banks did not work in Hong Kong, then digital-only banks are unlikely to succeed in Singapore as well. We expect DBS (SGX:D05) and OCBC (SGX:O39) to provide dividend yields of 4.0% and 4.7% for 2021F and 4.9% and 5.2% for 2022F respectively.
  • Maintain OVERWEIGHT.



Hong Kong experimented with virtual banks.

  • The Hong Kong Monetary Authority (HKMA) had awarded 8 virtual bank licenses in 2019. These virtual banks are not allowed to have any physical branches and must meet minimum capital requirement of HK$300m (S$51m).
  • ZA Bank was the first virtual bank to commence operations on a commercial basis in Mar 20. Airstar Bank, WeLab Bank, Ping An OneConnect Bank, Ant Bank (Hong Kong) and Mox Bank subsequently commenced operations in 3Q20.
  • HKMA previously predicted that the 8 virtual banks would garner up to 5% of retail banking business in Hong Kong in aggregate.


COVID-19 pandemic delayed launches of virtual banks.

  • The new virtual banks were expected to launch commercial services by end-19. Most virtual banks missed their launch dates as the COVID-19 pandemic affected preparations to build their banking platforms. In particular, the virtual banks are required to conduct independent assessment of cybersecurity risks, which is HKMA’s biggest concern. The social unrest in Hong Kong that began since Mar 19 also hindered the recruitment of talent and technical workers from Mainland China.


Efforts to attract new customers.

  • New virtual banks intensified promotions to capture public attention and enhance brand awareness. ZA Bank 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, offered 1.9- 2.3%).
  • During the promotional period, WeLab Bank offered a cashback reward of 8% on all spending of up to HK$3,000, while Mox Bank offered cash rebate of HK$1,000 at 30 merchants.


Difficult to differentiate in a crowded market.

  • Customers in Hong Kong are accustomed to comprehensive services offered by global banks, such as Citibank, HSBC and Standard Chartered. The new virtual banks have to compete against the dominance of credit cards and Octopus cards. They will also be competing against one another to gain consumers’ mindshare. Customers will also compare them against online apps provided by incumbent banks. Thus, the new virtual banks will find it difficult to carve out a niche.


Reviews are uninspiring.

  • We utilise reviews posted by customers on Google to assess the progress of virtual banks in Hong Kong. The only virtual bank that gained traction with customers is Mox Bank (58 reviews with an average rating of 4.9 stars), a subsidiary of Standard Chartered. We attribute Mox Bank’s greater popularity to customers’ trust in incumbent Standard Chartered and access to more than 2,000 ATMs.
  • Customers’ typical complaints for ZA Bank (3.1 stars), WeLab Bank (2.6 stars) and Airstar Bank (1.0 stars) were:
    1. online apps crashing;
    2. poor customer service; and
    3. absence of online support.


Hong Kong’s virtual banks – The harbinger.

  • Singapore and Hong Kong share similar characteristics. Both cities are densely populated and serve as financial centres in the Asia Pacific region. The financial services industry is highly competitive with active participation by many global banks. Customers are well educated and highly affluent. Thus, if virtual banks did not work in Hong Kong, then digital-only banks are unlikely to succeed in Singapore as well.


Gradual normalisation of dividend payout.

  • COVID-19 vaccination is expected to complete by 3Q21. Regulators around the globe had restricted banks’ dividend payout in Jun-Jul 20 to ensure they have sufficient capital buffer to absorb loan losses and to support lending to power the economic recovery. Since then, many banks have reported 3Q20 results that were above expectations due to lower provisions for loan losses.
  • Cognisant of the improved outlook for the economy, regulators in the UK, EU, US and Australia have eased or removed the caps on dividend payout in 2021.
  • Singapore banks will resume their roles as yield plays. We envisage a two-step process in normalisation of dividend payout back to their pre-COVID-19 levels. See previous report: Singapore Banks - UOB Kay Hian 2021-01-12: The Business Model Of Digital-Only banks Is Broken? for detailed assumptions on Singapore banks' dividend payouts.

Maintain OVERWEIGHT on Singapore Banks






Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-15
SGX Stock Analyst Report BUY MAINTAIN BUY 31.480 SAME 31.480
BUY MAINTAIN BUY 14.620 SAME 14.620
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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