Brokers' take

Compiled by Lynette Tan

BANKS | NEUTRAL

CGS-CIMB, Sept 26

We did a survey using Grab and Singtel, entities that expressed interest in digital banking licences, and found cyber security, an intuitive app and interest rates, in that order, are key priorities of retail customers when choosing digital banks.

We also found a disconnect between a consumer's thoughts on the bank's shareholders and their banking behaviour. The bank's "shareholders" ranked fifth (and last) in priority, but it was evident that government-linked corporations commanded higher trust levels than commercial entities, with consumers correspondingly being more willing to use them as depository institutions.

Credit card fee income could be most immediately at risk to digital banks. An estimated $364 million of card fees (about 23 per cent of the market) could be at stake, but its impact may be muted given the many players.

Although 39 per cent of respondents (retail customers) are willing to put deposits in these banks, our study suggests the average amount a customer is willing to place is relatively small, ranging between $5,072 and $12,697 (4 per cent to 11 per cent of total domestic banking unit deposits).

Virtual banks are likely to force some friendly competition, but speedy growth could be inhibited by the Monetary Authority of Singapore's criteria of having to be profitable and well-capitalised while serving an "underserved" market.

DBS Bank and United Overseas Bank (UOB) have rolled out standalone digital banks in regional markets and stepped up efforts in digitalising processes. OCBC Bank is a laggard in this respect, but we believe it will be part of a consortium in the run for a license come end-2019.

SINGAPORE BANKS | POSITIVE

Maybank Kim Eng, Sept 25

Singapore banks have been actively lowering risk in their business mix with increasing focus on retail or wealth management, while largely limiting wholesale exposure to large corporates and larger small and medium-sized enterprises (SMEs).

In the past three years - for the local banks - 76 per cent of incremental loan growth was driven by corporate lending compared to 90 per cent for the Singapore banking system. Their return on assets in this segment have declined since 2015.

Read together with improving return on risk-weighted assets, we believe their loan growth has been directed primarily at large corporates and larger SMEs where spreads are narrower because of higher credit ratings. These lower risk weightings.

While this may not make them immune to asset quality risks heading into a downturn, it should provide some cushioning together with the ability to better manage these risks.

Despite an eight basis points year-on-year credit charge increase that we forecast for 2020E, the sector is set to deliver a dividend yield of 5.2 per cent - amongst the highest in the region. UOB is our top pick.

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