How Singapore’s digital banking license will impact Singtel, Sea, DBS, OCBC, UOB, iFAST and Razer

2020-12-07     drwealth
How Singapore’s digital banking license will impact Singtel, Sea, DBS, OCBC, UOB, iFAST and Razer

Three years ago, I wrote that the greatest threat to financial institutions would come from tech companies with huge customer bases built from non-finance businesses.

“Locally we see Grab moving into payment system with Grabpay. They too have a ready pool of customers whom they have been transacting all these while.

Now, imagine if you were to start a payment system from scratch. How are you going to get the customers? And why should they trust you?

Versus, if you already had customers paying you regularly. Would they be more willing to use your payment system?”

It took that long to prove I was right. The long awaited results of the full digital bank licenses have finally been announced – the non-finance companies, Grab-Singtel and Sea are a step closer to challenging the financial institutions.

This news created a lot of buzz over the weekend. Many investors were bullish on the winners and wanted to buy their stocks – Singtel and SEA specifically because Ant Financial is not listed yet and few are familiar with the last winning consortium. Moreover, with full digital bank licenses, Singtel and SEA would be able to offer products and services to consumers whereas those with wholesale licenses would be limited to B2B contracts.

The path to a new world of banking has been paved but we’ll face more uncertainties going forward.

Are these winners really great investments for years to come?

What about the losers especially since their share prices have came down?

Is this digital banking license a game changer?

What about the impact to local banks?

I hope to give you some answers.

How did the market react?

First, let’s look at how the stock market reacted to this piece of news:

  • Sea (NYSE:SE) was the first beneficiary to see its share price jumped 8% as the announcement was made just before the U.S. market began trading.
  • Singtel (SGX:Z74) share price rose as much as 10% before settling for a 3% gain for the day.
  • Razer (SEHK:1337) was down as much as 11.5% before regaining some of the losses and closed down by 7.1%.
  • iFAST (SGX:AIY) was the worst performer as it closed 31% lower.

The three local banks didn’t fare that badly. DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) were down by 1.6%, 1.2% and 1.7% respectively.

Here’s a summary of their share price movements on the first trading day after the announcement was released:

Company Status Share price movements
Sea (NYSE:SE) Full digital bank license +8%
Singtel (SGX:Z74) Full digital bank license (with Grab) +3%
OCBC (SGX:O39) Incumbent -1%
DBS (SGX:D05) Incumbent -2%
UOB (SGX:U11) Incumbent -2%
Razer (SEHK:1337) No digital bank license -7%
iFAST (SGX:AIY) No digital bank license -31%

Sea is going to be the Alibaba or Tencent in Southeast Asia, but smaller

Even without the digital banking license, Sea was already making waves with its ecommerce arm – Shopee (I bet you have came across its ads, and its jingle). It managed to wrestle market share from Lazada (Alibaba’s subsidiary) in a fragmented Southeast Asian market even though it entered the ecommerce game late.

Its share price has done tremendously well – up 396% in 2020 alone (1 Jan to 4 Dec 2020)! In fact, Sea was touted by Bloomberg as the best performing stock in the world! It has also surpassed DBS to become Singapore’s most valuable listed company since July 2020.

Sea has so much going for it and winning the digital banking license added a laurel to its already impressive achievements.

Business Model

Sea is beginning to resemble Alibaba and Tencent. It has the ecommerce arm like Alibaba and a gaming division like Tencent. Now, it has fintech like both of them. Sea has taken a leaf out of Alibaba and Tencent’s playbook.

As of 3Q2020, Sea’s fintech (DFS) revenue was non-existent at a mere 1% of the overall revenue. Ecommerce (EC) and games (DE) contributed 51% and 47% respectively. Taking this positively, there’s more growth to expect out of its fintech segment in the coming years.

In my opinion, Sea has the potential to be a Alibaba or Tencent in Southeast Asia and this makes it a very compelling investment. However, Southeast Asia is known to be a very difficult market because of the diverse culture, languages, political systems, religions and purchasing powers. This could become Sea’s major growth inhibiting factor.


In 3Q2020, Alibaba’s ecommerce revenue was about US$20 billion while Sea did only about US$0.6 billion. In the same period, Tencent’s game revenue was about US$11 billion as compared to US$0.6 billion for Sea. In terms of fintech revenue, Tencent did US$5 billion in the recent quarter while Ant Group reported US$11 billion for the first six months of 2020.

As you can see, Sea is nowhere near the two China tech giants and I suspect that Sea may never rise to their size given that the diverse Southeast Asia market is much harder to penetrate than a homogenous Chinese market.

Finance is a highly regulated field and getting a license in Singapore doesn’t automatically grant you the license to offer your fintech services in another ASEAN country. It is much easier to scale ecommerce or games across borders than finance because the former are not regulated. That said, Sea still has a lot of room to grow and that alone makes it a good investment.

As such, investors’ expectations for Sea is currently sky high and any disappointing news could send the share price tumbling. But such price corrections could present as good investment opportunities as long as the bad news are temporary.

Singtel is unlikely to be rejuvenated by its new financial services

Most of us should know the good old Singtel – Singaporeans had a chance to buy its discounted shares when it was listed in the 90s. It went on to acquire other telcos in the region and dominated the market share in Singapore. It was also once the largest Singapore listed company until DBS overtook its pole position.

Today, it is a shadow of its former glory as telcos have fell from grace. Although Singtel remains a critical infrastructure for our information economy, its telco service has been commoditized like water and electricity supply. The government has to make internet access cheap for all and that has reduced Singtel’s profit margin over the years as the industry was opened up to more competition.

Singtel’s share price was trading around $4.50 at its peak and now hovers around $2.50. That’s almost a 50% drop for one of the largest blue chips in Singapore history.

Many would be quick to blame the management for the poor showing but I think it is more than that. As mentioned above, the commoditization of telecommunication is one external problem Singtel had faced.

On top of that, the management hasn’t been resting on their laurels. Quite the opposite – Singtel has introduced a mobile banking and payment app, Dash, with Standard Chartered previously. Unfortunately, it didn’t take off. I think it was an market timing issue – they were too early and the mass market hasn’t caught up with fintech or mobile wallets at that time.

Fast forward to today, Singtel is trying once again but this time with a tech company instead of a bank – Grab.

Personally I have always believed that Grab and Singtel are in the best position to be a digital bank among all the contenders. Grab already has a payment wallet and has a wide pool of users. This makes adoption readily possible. Singtel can also bring its large user base to the table and play the role of a ‘reliable’ partner whom the government would approve of.

The partnership would combine the innovative nature of Grab and the stability offered by Singtel. It is almost like an yin-yang relationship that is a more acceptable and ‘safer’ approach to change things around in Singapore. Also, in terms of geography, Singtel is big in India and Australia while Grab is stronger in Southeast Asia. Combining with Gojek would benefit this partnership further.

Should you invest in Singtel in this case? Unfortunately, I don’t think it is as compelling as Sea.

This is because its telecommunication segment remains large but its fintech revenue isn’t going to be huge relative to its current business.

As of 3Q2020, Singtel makes about S$7 billion from its businesses. Out of which, S$0.4 billion came from its Group Digital Life segment which are non-telco businesses. I am not sure if the fintech would be parked under this segment or if a whole new segment would be created.

Currently, the license only allows Grab-Singtel to operate in Singapore. It is a small and competitive market. For Singtel to make another S$7 billion of revenue from financial services, Grab-Singtel needs to make S$17.5 billion together for Singtel to receive 40% of the revenue share.

DBS, on the other hand, made S$21 billion revenue in 2019. The partnership would need to offer a major disruption to the local incumbent in order to takeover the majority banking market share in Singapore. I think this situation is hardly possible.

Grab-Singtel would face the same problem Sea had when expanding its financial services in Southeast Asia. It required a new license in every country and every government wants their own enterprises to build out their own digital banks rather than to allow a foreign entity to dominate its own market. Even if it is granted a license, it needs to tailor to the local’s culture, language, religion and purchasing power – it’s not easy to figure out a viable business model right from the start.

Hence, I believe that the financial services is not going to contribute in a big way for Singtel, at least not in the near future.

iFAST will do fine but share price have more room to go lower

iFAST’s share price took a beating after failing to clinch the digital bank license. But I think this is an overreaction. While the license would give iFAST more room for growth, its business isn’t bad without it. This is because iFAST has grown well in the past – its revenue was growing at 20% compounded annual growth rate between 2004 and 2019.

Hence, I think the growth trajectory would continue and iFAST would do fine with its current suite of B2B, financial advisory, brokerage and fintech services.

With a PE ratio of 58 prior to the big drop in share price, it was clear that investors were expecting iFAST to win the license and had priced it accordingly.

However, even at PE 44, I don’t think iFAST is cheap and a deeper correction is needed before it becomes an attractive buy again.

Razer will also do fine without the banking license

Three years ago, Razer’s CEO, Tan Ming-Liang, wanted to propose an e-payment solution to Singapore’s prime minister. Below was the Twitter’s exchange:

Recently, Razer launched the Razer card with Visa. It is leveraging on its gaming audience to use its fintech services. This makes perfect sense – back to my point about non-finance tech companies posing the greatest threat to finance. They simply have amassed a big audience and the parallel to move into is often payments.

Similarly to iFAST, Razer’s revenue has been growing decently with just its core offering (game peripherals and services) at a compounded annual growth rate of 27%.

Hence, Razer will also do fine without the digital banking license. In fact, Razer is the most sensibly priced in the stock market at the moment. I guess the market participants didn’t think it will win in the first place.

DBS, OCBC and UOB will continue to be key players

Finally, let’s talk about the incumbents – the local 3 banks.

DBS immediately put out this warning shot to the new digital bank licensees on its Facebook page:

The local banks are offering more digital banking solutions more than ever before.

Many transactions can be done on their apps now and one does not need to go down to the branches to even open an account. Pretty convenient.

That begs the question, how much difference would these new digital bank licensees offer to the consumers?

We can take some references from the existing roboadvisors. They have lured some investors with better user experiences, lower fees and high savings rates. And yet, they are not able to take a big chunk of assets from the banks.

Newcomers face two major challenges.

First, financial services require much higher level of trust compared to ecommerce, games, ride hailing or telecommunication services. This is where the 3 incumbents still have an advantage. The newcomers need to roll out their financial services to the early adopters and the masses would only jump in later, when the confidence improves. This would buy time for the incumbents to innovate.

Second, the three banks are pivotal to the financial system in Singapore. Even though we have many banks in Singapore, our government has always used the three local banks when rolling out their policies.

You can only use the three of them when you want to open a CPF Investment Scheme or Supplementary Retirement Scheme (SRS) accounts. You have to open a child development account with any of the three local banks if you want to receive the government grant. Singapore dollar denominated bonds are also currently issued by DBS. Such infrastructure and trust cannot be replaced overnight. Introducing competition helps the incumbents to innovate, rather than put them out of business.

Hence, I think the three banks would still be good long term investments and there’s no reason for the knee jerk reaction to sell. That said, investors should expect margin compression as the competition is likely to compete on price among other features.

Digital banking license is a significant milestone but don’t be too overly optimistic about it

You should know by now how I feel about this digital banking license episode – there’s too much anticipation and rosy expectation. It is not likely to change the fortunes of Singtel significantly. As for Sea, although it has a greater growth prospect, it is not a blue sky scenario either. Southeast Asia is a tough market and financial services are licensed activities that would slow down the speed of regional expansion while Singapore is a small market with intense competition.

On the flip side, it is not the end for those who didn’t get the license. iFAST and Razer would continue to grow their existing businesses but share prices would need time to adjust back to pre-banking license levels.

The three banks will do fine too, but are likely to face lower profit margins due to the impending competition. They remain critical to the financial infrastructure in Singapore and most customers still trust them more.

I hope my analysis is useful for you.

Side track a little. I don’t know if you realized it. Temasek has stakes in the Grab, Singtel, Sea and DBS.

Regardless if the newcomers or incumbents win market share in the future, Temasek has already hedged its bets. This is good for Singapore.

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