Highly anticipated award of digital banking licenses. MAS has awarded two digital full bank (DFB) licenses to (1) Grab-SingTel and (2) SEA Ltd. Meanwhile only two digital wholesale bank (DWB) licenses were awarded to (1) A consortium which includes Greenland Financial Holdings, and (2) a Chinese payments company. The new digital banks are expected to commence operations from early 2022. 

A different approach to banking? We believe the DFB’s existing businesses already give them a wide distribution and would easily facilitate their customer acquisition; however, the key challenge will be getting customers to use them as their primary bank account. The digital banks should also be able to leverage various datasets such as ride hailing, telco, ecommerce and payments. These alternative datasets could potentially provide greater insights to better serve their target SME/Youth segments.

Stepping stone for SingTel & SEA’s regional fintech ambitions. We believe Grab-SingTel’s competitive strength lies in its reach, while SEA’s lies on its distribution platform. It is too early to accurately gauge the valuation upside but we believe Singapore in itself is unlikely to be significant. The more material value creation would be from capturing the potential growth of digital financial services in ASEAN. Assuming investments of S$600-900 mn over the next 3-5 years, we believe SingTel should still be able to meet our DPS estimates of S¢11.0-12.5 per share, while SEA, with a cash balance of US$3.5 bn (S$4.7 bn) should also have no issues funding the investment into its digital bank. Our telecoms and internet analyst, Varun Ahuja, has OUTPERFORMs on both SEA and SingTel.

 Limited impact on Singapore banks for now. The initial restriction on activities of DFBs should ensure limited impact on incumbents in the near term but increases competition risk in the long term. Nonetheless, we believe the Singapore banks are well prepared, and invest S$0.4-1.1 bn p.a. on tech, and have also launched their own digital banks overseas. Additionally, they have also been partnering with non-banks to provide holistic solutions beyond financing, and their regional network is also a key advantage. We are positive on the Singapore banks and our top picks are UOB and DBS.