SINGAPORE (June 20): The Monetary Authority of Singapore (MAS) is studying the potential for opening the doors to “digital-only banks with non-bank parentage”.
But CGS-CIMB Research dismisses fears that such virtual banks on could put a dent in the market share of incumbents DBS Group Holdings (DBS), Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) – at least for now.
“We think that virtual banks are not likely to threaten the primary lending businesses of DBS, OCBC and UOB in the near term,” says lead analyst Andrea Choong in a report on Wednesday.
The way Choong explains it, virtual banks will first have to raise significantly large funding and capital bases to cater for corporate companies’ needs. And they will also need time to scale up their operations.
Already, there are some companies waiting on the wings to pounce on the opportunity.
SoftBank Group Corp-backed Grab, for instance, is said to be close to hiring a consultancy to advise it on its banking potential and is gearing up to apply for a digital-only bank license in Singapore if MAS decides to open up the sector.
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Observers say a potential entry by Grab and other virtual bank applicants could mark the biggest shake-up in years for a sector dominated by DBS, OCBC and UOB.
But given their capital constraints, Choong believes they are likely to focus on the underserved pockets of the retail and SME segments, with possibly weaker credit profiles.
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“We believe that the banking pie is large enough to be shared, with various players serving different segments,” Choong says.
Furthermore, she opines that the incumbents are well placed to put up some stiff competition.
On top of the high bank account penetration rate in Singapore at 98%, Choong also notes that DBS and UOB already have digital platforms in place.
As such, CGS-CIMB is keeping its “neutral” rating on the Singapore banks sector.
While the banks have already seen a 12-16% sell-down in May on the back of escalating US-China trade tensions, Choong believes their share prices could fall even further.
According to Choong, a key downside risk for Singapore banks is potential interest rate cuts by the US Federal Reserve.
“A cut compounds our fears of a sequential de-rating of the sector,” Choong says. “Has the market priced in a Fed rate cut? We don’t think so.”
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“That said, we believe that the bank’s steady asset quality metrics and robust capital levels provide some baseline support for the sector at current valuations,” she adds.
UOB is CGS-CIMB’s preferred pick in the sector, followed by OCBC, then DBS.
The brokerage has an “add” call on UOB with a target price of $29.58.
“UOB’s 1Q19 loan growth was the strongest amongst peers at +3.0% q-o-q,” Choong says. “However, NIM expansion has underperformed its peers, having contracted for four consecutive quarters.”
As at 3.53pm on Thursday, shares in UOB are trading 0.9% up at $26.38.
Meanwhile, CGS-CIMB has “hold” call on OCBC and DBS, with target prices at $12.59 and $27.64 respectively.
As at 3.53pm on Thursday, shares in OCBC are trading 1.0% up at $11.29, while shares in DBS are trading 2.0% up at $25.93.
