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BT EXCLUSIVE

Brokers' take: Singtel may commit over S$600m to Grab digital-bank venture

Grab - Singtel - ST FILE PHOTOS.jpg
In DBS's view, the Grab-Singtel venture has the potential to win 2-4 per cent of the Singapore consumer market in five years.

IN the long term, Singapore Telecommunications (Singtel) might have to commit more than S$600 million in total to its joint venture (JV) with Grab Holdings to set up a digital full bank in Singapore, according to estimates by DBS Group Research and Citi in recent reports.

Citi noted that this equity capital infusion can be built up over several years and not necessarily delivered upfront, so it won't cause a capital drain for Singtel.

"As such, we don't believe that the digital bank will materially weigh down on Singtel's free cash flow or dividend payment potential," Citi said in a note last week.

Analysts from both research teams also reckoned the JV may be one of the frontrunners for the licence.

DBS analyst Sachin Mittal on Tuesday said the entity has the potential to win 2-4 per cent of the Singapore consumer market, excluding mortgages, in five years. It may also achieve breakeven in four to five years.

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Singapore's biggest telco and the ride-hailing and fintech giant are together gunning for a full digital banking licence in the city-state. Grab will hold a 60 per cent stake in the entity while Singtel owns 40 per cent.

Before the end of this year, the Monetary Authority of Singapore (MAS) will award as many as five digital bank licences. These will include up to two full digital banking licences to provide financial services and allow deposits to be taken from retail customers.

The Grab-Singtel JV is a "strong candidate" for this permit, according to DBS. Citi likewise believes the JV “holds some of the critical elements in making a digital bank work”.

The four other shortlisted contenders for the full digital banking licences are gaming, e-commerce and payments firm Sea Ltd, a Razer Fintech-led consortium including Sheng Siong's founders and FWD Insurance, a V3 Group-led consortium including Heliconia Capital Management, and a venture between MatchMove and Singapura Finance.

In February, an S&P report had said that Shopee parent Sea's move may offer an edge over the Grab-Singtel entity, given the snug fit between e-commerce and digital banking.

DBS on Tuesday noted that the Grab-Singtel tie-up's target market could be the digital-first users and small and medium-sized businesses that struggle to obtain funding.

Both Grab and Singtel possess a large amount of high-frequency real-time data, such as for payments and ride-hailing on their digital platforms. The full digital bank could thus leverage this to create a reasonable and reliable internal credit model, according to DBS.

While no details have been disclosed publicly, the analyst believes the JV might target Grab drivers and hawker-centre and food partners for unsecured loans and credit solutions, given the vast amount of data lying with Grab and GrabPay.

"Products offered through this consortium are likely to seamlessly integrate into the daily lives of Grab's and Singtel's large, highly engaged customer base," said Mr Mittal.

Singtel has a subscriber base of about 4.3 million as at June 2020, while Grab has over 187 million users across South-east Asia, he added.

In DBS's view, over the next three to five years, the JV could target to acquire 4-5 per cent of Grab's user base in Singapore along with 20-40 per cent of Grab partners. This could translate to some 150,000 to 200,000 customers for the digital bank.

Citi last week wrote that both companies can cross-sell services and offer customised experiences, thanks to the breadth and depth of their customer relationships and data analytics.

“This places the Grab-Singtel JV in a position to generate value… Some successful digital banks run at 3-5 times of their book value,” Citi added. 

“Assuming the digital bank succeeds, value could expand marginally for the group. Prospects for success are likely better as compared to earlier adjacent investments given its advantages,” said Citi’s Arthur Pineda and Hussaini Saifee.

They pointed out that beyond basic deposit services, the entity could sell targeted insurance to Grab users or frequent mobile travellers, engage in consumer financing and create an interoperable mobile wallet system across markets.

Other possibilities include performing remittances for foreign workers and offering cash management platforms for vendors, according to Citi.

DBS's Mr Mittal said Singtel "should be able to build trust among its customers for taking bank deposits", seeing as it is a Temasek-controlled entity and a trusted telecommunications player.

The telco 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 the payment, lending and insurance solutions under Grab Financial Group has enabled the super-app to "become well acquainted" with what the unbanked and underbanked segments require, DBS noted.

The Business Times reported in March this year that former Citibank Singapore retail banking head Charles Wong would join the JV, and is likely to play a key role in the digital full bank if the consortium secures the licence.

Separately, on Tuesday, Mr Mittal wrote that Singtel's core business is undervalued. The market value of Singtel's associates is S$2.17 per share, about the same as Singtel's share price, and implies that the market is not assigning any value to its profitable core business in Singapore and Australia.

An asset divestment is required to unlock the trapped value, the analyst said.

He maintained a "buy" rating on Singtel with a target price of S$2.69.

Citi likewise kept its "buy" call on the stock, with a S$3.50 target price, and sees a digital bank win as a potential positive for the name.

Shares of Singtel fell S$0.02 or 0.9 per cent to trade at S$2.10 as at 2.38pm on Tuesday.

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