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Tue, October 27, 2020 – 2:23 pm
UPDATED Tuesday, October 27, 2020 – 2:56 pm
In the long term, Singapore Telecommunications (Singtel) may have to commit more than S $ 600 million in total to its joint venture (JV) with Grab Holdings to establish a full digital bank in Singapore., according to estimates by DBS Group Research and Citi in recent reports.
Citi noted that this injection of equity capital can be built up over several years and is not necessarily delivered in advance, so it will not cause a capital loss for Singtel.
“As such, we do not believe that the digital bank will materially weigh on Singtel’s free cash flow or dividend payment potential,” Citi said in a note last week.
Analysts from both research teams also considered that the joint venture could be one of the leading companies in obtaining the license.
DBS analyst Sachin Mittal said Tuesday that the entity has the potential to gain between 2% and 4% of Singapore’s consumer market, excluding mortgages, in five years. It can also break even in four to five years.
Singapore’s largest telecommunications company and the financial technology and ride-sharing giant are fighting together for a full digital banking license in the city-state. Grab will have a 60 percent stake in the entity, while Singtel owns 40 percent.
Before the end of this year, the Monetary Authority of Singapore (MAS) will grant up to five digital banking licenses. These will include up to two full digital banking licenses to provide financial services and allow deposits to be taken from retail customers.
The Grab-Singtel joint venture is a “strong candidate” for this permit, according to DBS.
Citi also believes that the joint venture “contains some of the critical elements to make a digital bank work.”
The other four shortlisted candidates for full digital banking licenses are gaming, e-commerce and payments firm Sea Ltd, a consortium led by Razer Fintech that includes the founders of Sheng Siong and FWD Insurance, a consortium led by the V3 Group that includes Heliconia Capital Management, and a partnership between MatchMove and Singapura Finance.
In February, an S&P report had said Shopee’s parent Sea’s move could offer an advantage over entity Grab-Singtel, given the perfect fit between e-commerce and digital banking.
DBS said Tuesday that the target market for the Grab-Singtel alliance could be digital first-time users and small and medium-sized companies struggling to obtain funds.
Both Grab and Singtel have a large amount of real-time high-frequency data, such as payment and transport data, on their digital platforms. The entire digital bank could take advantage of this to create a reasonable and reliable internal credit model, according to DBS.
While no details have been publicly disclosed, the analyst believes the joint venture could target Grab drivers and street vending centers and food partners for unsecured loans and credit solutions, given the large amount of data found. in Grab and GrabPay.
“The products offered through this consortium are likely to integrate seamlessly into the daily life of Grab and Singtel’s large, highly engaged customer base,” Mittal said.
Singtel has a subscriber base of about 4.3 million as of June 2020, while Grab has more than 187 million users in Southeast Asia, it added.
In DBS’s view, over the next three to five years, the joint venture could aim to acquire 4 to 5 percent of Grab’s user base in Singapore along with 20 to 40 percent of Grab’s partners. Grab. This could translate into some 150,000 to 200,000 customers for the digital bank.
Citi wrote last week that both companies can cross-sell services and offer personalized experiences, thanks to the breadth and depth of their customer relationships and data analytics.
“This puts Grab-Singtel JV in a position to generate value … Some successful digital banks operate at 3-5 times their book value,” Citi added.
“Assuming the digital bank is successful, the value could expand marginally for the group. The prospects for success are probably better compared to previous adjacent investments, given their advantages, “said Arthur Pineda and Hussaini Saifee of Citi.
They noted that beyond basic depository services, the entity could sell specific insurance to Grab users or frequent mobile travelers, participate in consumer financing, and create an interoperable mobile wallet system across markets.
Other possibilities include making remittances for foreign workers and offering cash management platforms for suppliers, according to Citi.
DBS’s Mittal said Singtel “should be able to build trust among its clients to receive bank deposits,” given that it is an entity controlled by Temasek and a trusted telecoms player.
The telecommunications company has also been investing in its digital business, in areas such as cybersecurity, which will add value to the digital banking arm.
Meanwhile, Grab’s experience with the GrabPay wallet and Grab Financial Group’s payment, loan and insurance solutions has allowed the super application to “get a good feel” with what the unbanked and unbanked segments require, DBS noted.
The Business Times reported in March this year that former Citibank Singapore retail banking director Charles Wong would join the joint venture, and is likely to play a key role in the digital full bank if the consortium is licensed.
On the other hand, Mittal wrote on Tuesday that Singtel’s core business is undervalued. The market value of Singtel’s associates is S $ 2.17 per share, approximately the same as Singtel’s share price, and implies that the market is not placing any value on its profitable core business in Singapore and Australia. .
An asset divestment is required to unlock trapped value, the analyst said.
It maintained a “buy” rating on Singtel with a price target of S $ 2.69.
In addition, Citi maintained its “call” option on the stock, with a price target of S $ 3.50, and sees the profit from a digital bank as a potential positive for the name.
Singtel’s shares fell 0.02 Singapore dollars or 0.9 percent to trade at 2.10 Singapore dollars as of 2.38 pm on Tuesday.
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