Hazelle
in Memos & Musings · 9 min read
Last month, MAS had awarded 4 parties with the digital bank licences to operate digital only banking services in Singapore. This move has revolutionized the banking sector and integrated the digital architecture into the banking industry. How is this going to impact us as investors in the stock market?
To give a brief summary of the facts, the licences were awarded to non-banking companies to give them the authority to provide banking services such as opening of accounts and issuing of credit cards. There are 2 types of digital bank licences: digital full bank and digital wholesale bank. The former allows the companies to provide banking services to both retail and corporate customers while the latter only allows provision of services to the corporate customers. If you do not know by now, the consortium comprising Grab and Singtel and Sea Ltd are the ones that won the full bank licence. Ant Group and a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management emerged as the awardees for the wholesale licence. These companies won based on their business model that encompasses the use of innovative technology to exhibit sustainability of this digital banking business. You can expect that this will slowly and eventually become the new way of banking.
Why are these non-financial digital banking companies becoming the new hype? What is the impact on you and I as retail customers and the impact on corporate customers?
The main value propositions are that customers can enjoy higher interest rates due to the absence of physical branches and ATMs which can help these digital banks cut down on a lot of the fixed and overhead costs. Very importantly, people these days value convenience and efficiency and these are what the digital banks are able to provide. The use of algorithms can also increase the personalisation of the service offerings thereby providing more flexibility in their innovative services.
We can generally expect to see high acceptance and take-up rates especially among the millennials. Remember those times when we used to pay our friends physical cash after a meal together? Look at how we have transformed from using physical cash to Internet banking and to mobile apps like PayNow and Google Pay. With technology, change is the only constant now.
And Singapore is not the first to the game. In 2019, Hong Kong had already issued the licences to companies to operate the virtual banks. We are also familiar with Alibaba and Tencent in China.
On the day that MAS released the announcement, Sea Limited’s share price rose by 8.31%. Clearly, investors are exhibiting high positivity with this digital banking movement. The new revenue stream can increase the profitability of these businesses by getting a piece of the pie in a sector that they were not previously in. And they are not just going to be small fishes in this banking services sector. Their business model which taps on innovative use of technology will help them seize an increasing amount of the market share if the traditional banks do not up their game by modifying their current business model. Like I said previously, with technological advancements, change is the only constant. So only companies that continuously innovate through the use of technology to provide more customer centric solutions can make it to the top. This is why the future performances of these digital banking companies are something worth looking forward to, making them attractive investments to many investors now.
If you are a trader, this might be a good opportunity for your trading profits because the hype may be able to push up prices or cause abrupt changes in the stock prices. But if you are a long term investor, the same old rules apply. Do your proper research on the fundamental performances of the business and compute the intrinsic value of the stock to understand if the current market prices truly reflects the value of the stock. Because a hype usually results in emotional and irrational decisions by the retail investors, pushing prices up more than what they are worth now. And without actual statistics on the performance of this new revenue stream for the companies, no one knows for sure what the future entails. We do not know how much earnings growth this new revenue stream can bring about. It can be risky if we just jump into the hype blindly because prices can just crash any time.
Singtel’s stock has been on a downward trend since 2015. After the digital bank licence announcement, Singtel saw a slight upward trend for the first time since the last 5 years. But is this upward trend going to continue? Well, we cannot say for sure now as no one can predict the future. What we know based on statistics is that we do not see consistently increasing revenue, gross profit or net profit. And these are just one of the many indicators we look out for. How much this new revenue stream can bring about to Singtel in its 40% stake in the consortium with Grab is still unknown. According to the press release by Grab, the digital bank is expected to launch in early 2022 so we are still pretty much in the early stage.
As for Sea Limited, there is a lot of hype around this tech stock even before the digital bank announcement was released. I would say the current market price is overvalued for now at the point of writing this article. Of course there is a lot of potential for Sea Limited but I will not add a position for longer term investing purposes until there is a price correction.
In short, there isn’t much data that we can rely for now to predict the future growth of this digital bank landscape in Singapore. As a investor I do not like to just enter a position without seeing more solid performances and data. Yes they say that past performance is not indicative of future performance. But I would rather put my money on something that has at least been doing well at the moment than on something that is threading new grounds. I do not believe in jumping in just for the hype if I am investing for the long term. If it is a short term trade, it might still be alright but I would probably choose something that I am more certain to trade on. Always remember to fall back to check on the fundamentals of the business and perform some technical analysis before you enter a position.
About Hazelle
Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.
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