SINGAPORE (Jan 8): Analysts remain bullish on Singapore banks, even as the Monetary Authority of Singapore (MAS) announced Tuesday that it has received 21 applications for new digital bank licences.
While MAS did not name the applicants, it said the new digital bank licences have attracted “strong interest from a diverse group of applicants”.
Seven groups had applied for the digital full bank (DFB) licences, while 14 others applied for the digital wholesale bank (DWB) licences.
Singapore has a total of two DFB and three DWB licences up for grabs.
The DFB licences allows firms to serve all kinds of customers and require $1.5 billion in capital as well as local control, while the DWB licences have a capital commitment of $100 million and allows foreign firms to hold majority stakes.
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MAS said it will evaluate all eligible applications based on their value propositions, and announce the successful applicants in June 2020. Successful applicants are expected to commence business by mid-2021.
“Our scenario analysis suggest that even with aggressive growth, Singapore’s digital banks are unlikely to gain material market share in the medium term,” says Maybank Kim Eng Research analyst Thilan Wickramasinghe in a Jan 7 report. “We estimate that in the three years from launch, the new banks will account for just 1.2% of Singapore dollar loan market share.”
As such, Wickramasinghe is keeping his “positive” rating on the Singapore banks sector.
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Over at CGS-CIMB Research, lead analyst Andrea Choong is also keeping her “overweight” rating on the sector.
“While we equate the many applications as a sign of healthy competition in the industry, we believe that adherence to compliance requirements and the fervency of regulatory reporting could be crucially underestimated by some of these applicants,” Choong says in a sector flash note on Jan 7.
“While we anticipate stiff digital competition over the medium term, financial impact to deposits and fees should be manageable,” she adds.
Choong names DBS as her top pick in the sector, with an “add” call and a target price of $28.29.
“DBS runs a digital-first strategy in India and Indonesia via Digibank,” Choong notes. “The virtual bank has since commenced lending operations, but we understand that the road to profitability could be a medium-term story.”
Meanwhile, Maybank’s Wickramasinghe also ranks DBS as a top pick, alongside UOB.
The brokerage has “buy” recommendations on both DBS and UOB, with target prices at $29.92 and $30.50 respectively.
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“The Singapore banks offer defence with a chance of upside and some of the highest dividend yields regionally,” Wickramasinghe says.
“We believe near term drivers for the sector should be asset quality, earnings growth and dividend yields,” he adds. “In this context, UOB and DBS are our top picks given strong, cautious balance sheets and regional growth.”
As at 4.35pm, shares in DBS are trading 30 cents lower, or down 1.2%, at $25.75, while shares in UOB are trading 2 cents higher at $26.72.
According to Maybank valuations, DBS is trading at an estimated price-to-earnings (P/E) ratio of 10.2 times and a dividend yield of 5.3% for FY20E. Meanwhile, UOB is trading at an estimated P/E of 9.7 times and dividend yield of 5.2% for FY20E.
