• Grab-SingTel (60:40) consortium wins one of the Digital Full Bank (DFB) licences in Singapore.
• Represents an expansion into a potentially profitable business in the long run, though we do not see major earnings impact for SingTel (SGX:Z74) in FY21-24F.
• SingTel’s share of the capital requirements are manageable. Its dividend-paying capacity remains intact.

Digital Full Bank (DFB) Licence Win Is a Positive Longer-term Development for SingTel

• The Grab-SingTel (60:40) consortium secured one of the two digital full bank (DFB) licences that were awarded by MAS on 4 Dec. This is not a major surprise, as the market has billed the Grab-SingTel consortium as a front-runner.
• We view this positively for SingTel, as it represents an expansion into a potentially profitable business over the medium-to long-term and a diversification away from its mature telco businesses.
• The partnership with Grab, which we believe is one of the most innovative companies globally, allows both parties to leverage each other’s sizeable customer bases (i.e. faster go-to-market, lower customer acquisition costs) and digital capabilities, which raises the chance of success, in our view.

No Major Impact on SingTel’s Net Profit Over the Next 3 Years

• We do not see this having a major impact on SingTel’s net profit in the next 3 years. The Grab-SingTel bank (GSB) can start business from early-2022 but is expected by the Monetary Authority of Singapore (MAS) to operate for 1-2 years in the restricted phase where it cannot widely solicit deposits from the public (only shareholders, employees, existing customers of the parent entity) and there is an aggregate deposit cap of S$50m.
• The Grab-SingTel bank (GSB) is only expected to become a fully-functioning Digital Full Bank within 3-5 years (i.e. CY24-26), when the deposit cap and limit on scope of depositors are lifted.
• Moreover, we believe the growth of GSB will be progressive as the traditional banks have made inroads into digital banking services in the last few years and will respond to defend their lucrative banking businesses. Strict regulatory compliance could also impede how fast/cost-efficient GSB is able to execute business expansion strategies, compared to other areas where digital services are less regulated.

Manageable Capital Requirements; Dividend-paying Capacity Intact

• Downside risks for SingTel are limited, in our view. In terms of capital requirements, its share may be a minimum of S$600m in 3-5 years (i.e. 40% of the minimum S$1.5bn paid-up capital of a full functioning DFB). Assuming annual investment of S$200m p.a. over 3 years, SingTel’s net debt/group EBITDA would only be slightly higher at 1.53x/1.56x/1.55x at end-FY23/24/25F (vs. our current forecast of 1.50x/1.50x/1.48x) and hence, is unlikely to affect its dividend-paying capacity.
• Ultimately, given Singapore’s relatively small population size, we believe the longer-term goal for SingTel would be to leverage GSB’s track record/expertise to secure digital banking licences in other markets (possibly within its regional telco footprint) when the opportunities arise.

Maintain ADD on SingTel With Unchanged Earnings Forecast

• No changes to our earnings forecasts, target price and ADD rating for SingTel, as we await further clarity from SingTel on GSB’s detailed business plans, capital requirements and financial targets.
• Key catalysts: H-o-h 2HFY21F earnings recovery, asset monetisation.
• SingTel is one of the CGS-CIMB's latest Singapore stock picks.

Source: CGS-CIMB Research - 5 Dec 2020