iFast eyeing Europe for potential digital banking licence

Singapore

WEALTH management platform iFast Corporation has been one of the top performing stocks on the Singapore Exchange this year. Its shares have nearly trebled in value as investors anticipate better financials and growth prospects in overseas markets.

The company has set out its ambition to build a global business model. Europe would be among the jurisdictions considered as part of its plans to pursue more licences, chief executive Lim Chung Chun told The Business Times in an interview.

Lim sees the fintech industry becoming increasingly global, in the same way that industries such as e-commerce, music and video streaming are more global too.

"If that's going to be the eventual trend I think, in looking at the opportunities out there, we shouldn't really be limited just by the few existing markets we are in," he said.

Eyes abroad

Building a "truly global business model" and acquiring licences in different jurisdictions, including in digital banking, are key parts of a 5-year plan set out by iFast last month, when announcing its third quarter results.

"The reason why we're so keen on digital banks is because actually banking and digital banking are inherently closely linked to wealth management," Lim said, as the starting point for most wealth management products is cash.

"For us to fully be able to achieve that potential that we're looking for in the long run, I think we would like to essentially get into (the digital banking) area," he said.

Lim observed, however, that many countries tend to take a "relatively cautious approach" with issuing banking licences, particularly in Asia, given concerns over whether players are strong enough to sustain such businesses in the long run.

He said: "In a sense, it's still very much an industry where it's a bit of an invitation-only club for the players."

The company had unsuccessfully applied for digital banking licences in Singapore and Hong Kong. Earlier this year, it also submitted an application to Malaysia for such a licence.

Nevertheless, Lim said, regulators in some areas are taking a more open approach, Europe being one example. These countries are ready to allow non-traditional companies to enter the space, with a greater focus on whether they can run the business properly.

"When it comes to, firstly, being able to acquire the digital banking capability or licence, I think Europe will be one of the areas that we will actually look at," Lim said. "In the fintech world, things will increasingly become borderless, and that can still fit into our overall long-term plan as well."

Lim declined to go into specific timelines or countries that are being targeted, but said it would be part of the company's 5-year plan: "We are starting to actively plan for it."

He added that it is important for digital banks to have synergies with existing business to succeed. "In our case, because we're in wealth management... we feel that we will be able to have a successful business model."

Growing assets

Even without a digital banking licence, iFast has been growing steadily. Between FY2016 and FY2020, revenue more than doubled from S$80.6 million to S$169.9 million. For the first 9 months of this year, net profit has jumped 63.6 per cent on year to S$23.4 million - higher than the total for FY2020.

Some of the improvements came as trading volumes rose amid the pandemic - peaking in the first quarter this year - but Lim highlighted that overall revenue has improved and the business is not dependent solely on trading volumes.

The company has also grown its assets under administration (AUA), which it has used as an indication of the potential stream of recurring income in the long run.

In mid-2018 - when iFast's AUA was S$8.3 billion - the group announced a target to grow AUA to S$100 billion by 2028, representing a compound annual growth rate of 28 per cent. iFast said last month that it remains committed to this target - also part of its 5-year plan.

The target AUA sounds large, but Lim noted that similar businesses such as Charles Schwab in the United States have trillions in client assets. He said: "The point I am making is the potential for this wealth management platform business, it's actually tremendous. It goes beyond S$100 billion, it's a function of how well we execute."

Even as trading volumes eased from the peak, iFast has still seen healthy net inflows of client assets - nearly S$3 billion in the first 9 months of 2021 - and AUA reached a record S$18.4 billion as at end-September.

Singapore currently accounts for around 70 per cent of AUA, and the market is still expected to "grow healthily". At the same time, AUA share from Singapore should be less than half by 2028 as other markets grow.

China, being a big market, is expected to be a sizeable contributor, Lim said. The company's China segment has been loss-making, but Lim noted that it usually takes time to reach profitability.

"Even in Singapore, it took us 5 years; Hong Kong and Malaysia, it actually took us probably 7 years to turn profitable," he said.

While the Chinese market has big potential, Lim also noted the competition there.

"It is possible for it to take more years than some of our markets like Singapore, in terms of achieving the profitability, but we expect that eventually it will get there," he said, adding that it is important for iFast to invest sufficiently at this point.

Both iFast's business-to-business (B2B) and business-to-customer (B2C) segments have been growing quite well, Lim added.

Under the B2B segment, one area that has been growing rapidly is its inhouse financial advisory arm, iFast Global Markets (iGM), which was started 4 years ago. The unit was set up as the company saw an opportunity in Singapore for a business model that focuses on simple low cost products.

"There's a tendency among many players in the industry to want to focus more on insurance products, because those give the best commission," Lim said. But he added that true advisers should be focused on whether they are recommending the most suitable product for clients. In the 4 years since iGM's launch, the division has grown pretty well, Lim said.

Overall AUA for iGM Singapore crossed the S$1 billion mark as at end-September, even though the unit has just 57 advisers.

Other channels

The other key pillar of iFast's 5-year plan comes from growing its Hong Kong business, where its new ePension division - which isn't part of the S$100 billion AUA target - is expected to start contributing substantially from 2023 to 2024.

It was announced in January that PCCW Solutions won the tender for Hong Kong's eMPF platform, and iFast is PCCW Solutions' prime subcontractor for a category that includes Mandatory Provident Fund (MPF) scheme operation services, transformation services and user delivery services.

iFast targets its overall Hong Kong business to hit net revenue of over HK$1.2 billion (S$208.1 million) in 2025. This segment reported net revenue of HK$106.5 million for FY2020. Based on the target profit before tax (PBT) margin of over 33 per cent in 2025, the Hong Kong business would contribute some HKS$396 million in PBT - higher than the entire group's S$25.4 million PBT in FY20.

But Lim said this does not necessarily mean that Hong Kong will be the biggest contributor by 2025. "We want to make sure we grow the various other markets including Singapore," he added.

The company would also be open to partnerships or mergers & acquisitions.

Lim said he is "comfortable" with the current balance sheet, including a net cash position of S$54.4 million as of end-September, but that a bigger balance sheet could still be helpful for certain parts of its 5-year plan.

Valuations

At its last traded price of S$8.64, iFast has a trailing 12 month price-to-earnings ratio of 78.5 and a price-to-book ratio of 19.1.

Bloomberg data shows six analysts covering the stock, with 4 'buy' calls, 1 'hold' and 1 'sell'. SPH, which publishes The Business Times, held a 14.6 per cent stake in iFast as of March.

When asked about the stock's valuation, Lim, who prior to starting iFast was head of research at ING Barings Securities, said: "I'm fundamentally an investor at heart. And as a value investor, you always look at the growth potential as well as the valuation."

He noted that new business models have become possible because of the Internet.

"That trend still has a long way more to go," he said. "Companies that are able to have a good business model that ride on it would be able to grow at a rate quite different from how industries have grown in the past."

He therefore thinks investors should evaluate stocks slightly differently. "This is a period when it's important to think in terms of longer-term expectations," he said. "What's going to happen to the business, what's going to happen to earnings, next five years and beyond, I think this is important."