- by Candice Lee
- 23 November , 2022
Earlier this week, the Monetary Authority of Singapore announced that it plans to increase deposit insurance coverage per depositor to S$100,000 (US$74,000) from the current S$75,000 (US$56,000).
If implemented, 91% of all depositors will be fully covered by deposit insurance.
While neither the banks nor the Singapore authorities will want to admit that the former are “too big to fail”, the reality is that DBS, OCBC, and UOB form an integral part of the Singapore economy and benefit from the city-state’s protection.
Their track record, diversification, and record-breaking profitability also give them an immense advantage over fintech startups, many of whom saw an opportunity to disaggregate the components of traditional banking and offer targeted solutions and better services.
A few years ago, 76% of banking respondents to a PwC survey feared that some part of their business was at risk from fintech startups.
However, the latter now face the prospects of downsizing amid an unfavorable macro environment.Record profits fueling digital investment
Last year, DBS, OCBC, and UOB all racked up all-time highs in profits.
Collectively, the three banks recorded total income of US$29 billion and net profit of US$14 billion in 2022. This represents a five-year compound annual growth rate (CAGR) of 5.6% and 7.4%, respectively.
While these are not startup-level growth rates, they are steady and coming off a much bigger base, providing the banks with the returns they need to compete with fintech upstarts.
They’re also no slouches when it comes to investing in tech. Over the four years through 2021, DBS made digital investments of US$3.6 billion. It then announced that it would invest US$222 million in 2022 to grow its digital and intelligent banking capabilities.
According to OCBC, it invested over US$185 million in the first phase (2019 to 2022) of its seven-year Digital Core Roadmap to accelerate digital transformation. In the second phase (2023 to 2025), it expects to invest another US$222 million.
Not to be outdone, UOB announced in 2021 that it was investing up to US$370 million in digital innovation initiatives to double the retail customers it serves digitally across Southeast Asia by 2026.
For comparison, fintech startups in Singapore have raised over US$6 billion between 2018 and 2022.
Notably, the number and value of fintech deals in 2022 were at five-year highs, despite the geopolitical and macroeconomic uncertainties of the past year.
However, the funding environment for 2023 so far has been much more muted. As of May 10, there were only 11 deals recorded by Singapore fintech firms, raising over US$346 million in total, according to Tech in Asia’s data.Fintech firms dwarfed by banks
So how have some of these well-funded fintech startups performed so far?
Let’s take a look at the lending and wealth sectors, two areas where fintech players are in direct competition with the core businesses of banks.
In the lending space, three of the Singapore-based fintech firms that have raised the most money are Atome, Funding Societies, and Validus.
To date, they have collectively disbursed around US$10 billion in loans.
While this figure may seem large, it is but a fraction of the 2022 loan book of any of the big three banks.
To be fair, many of the loans made by these fintech firms are to SMEs that may be underserved by the incumbents.
But none of these fintech lenders are likely to threaten the bread and butter of the big Singapore banks anytime soon.
Similarly, while wealthtech players like Endowus and StashAway have made a splash over the past few years, their assets under management are still far smaller than those of the main three Singapore banks.
These platforms have also been affected by the recent macroeconomic headwinds. StashAway laid off 14% of its staff in 2022, while Endowus followed with cuts of “less than 10%” of its workforce earlier this year.
In addition, StashAway’s 2022 year-on-year revenue growth of 13.5% was actually lower than the equivalent figures posted by UOB (18%) and DBS (16%).
This points to another advantage banks have over fintech firms – their diversified businesses mean they can thrive in a rising interest rate environment, since this raises their net interest income.
As central banks around the world have hiked interest rates significantly over the past year, all three banks saw a significant increase in the share of overall income generated by interest income.
On the other hand, in a falling interest rate environment, banks can rely on non-interest income to pick up the slack, with revenue generated from areas such as fees, service charges, and commissions.DBS most highly valued
Indeed, the public markets have recognized the value Singapore’s big banks are creating for their shareholders.
Between 2018 and 2022, all three banks saw their share prices go up. That said, they should not be viewed as a monolith, with each offering its own unique propositions.
DBS shares had the best performance of the three with a CAGR of 9.4%, followed by UOB at 5.8% and OCBC at 2.2%.
It’s no surprise, then, that DBS enjoys the highest valuation. Using the price-to-book ratio (P/B) metric, investors were valuing DBS shares at 1.6x at the close of 2022, up from 1.3x at the end of 2018.
Meanwhile, over the same period, UOB saw a slight uptick in its P/B ratio from 1.2x to 1.3x, while OCBC’s declined slightly from 1.2x to 1.1x.Structural improvement due to digitalization
Why is DBS more highly valued than its peers?
Perhaps, investors are giving the bank credit for the steps it has taken in its digital transformation journey, which kicked off almost a decade ago in 2014.
In 2021, UK financial publication Euromoney selected DBS as the world’s best digital bank.
In the bank’s 2022 annual report, CEO Piyush Gupta addressed the issue of its historically high return on equity. He noted that this was a “structural improvement,” the key to which was the bank’s digital transformation.
According to Gupta, digitalization has enabled the bank to “increase wallet share with lower marginal costs.”
Since 2017, these customers brought in, on average, more than twice the income compared to non-digital customers while being more cost-efficient to serve.AI, crypto, and acquisitions
Looking ahead, the Singapore banks face no shortage of competitors. Apart from fintech players, they will have to compete with new digital banks sponsored by tech companies, although it’s still too soon to say how this will affect their business.
See also: SG digibank GXS trails Trust in adoption as deposit cap hampers growth
All three banks are also looking at how to use AI to grow their business. DBS has come up with over 260 use cases for how AI, machine learning, and digital analytics can be deployed across the bank.
OCBC says it is leveraging AI and data analytics in the detection of financial crime, while UOB says it is using proprietary in-house AI and machine learning models to cleanse data and analyze customer behaviors and transactions on its TMRW app.
The banks may also face challenges from crypto startups trying to upend the established financial system. That said, many of these players are now struggling to survive, whether because of the fall in crypto prices, decline in funding, or regulators clamping down on their activities.
On this front, DBS has established the DBS Digital Exchange, which offers access to digital assets such as security tokens and cryptocurrencies.
It is also a sponsor of Partior, which uses blockchain and distributed ledger technology to address pain points in areas such as cross-border payments.
In contrast, UOB and OCBC do not appear to be as enthusiastic about crypto or digital assets.
UOB is likely to spend much of the rest of the year and 2024 integrating Citigroup’s consumer banking businesses in Indonesia, Malaysia, Thailand, and Vietnam, which it acquired in 2022.
OCBC, meanwhile, is on the hunt for acquisitions in Indonesia to speed up its growth.
With their scale, resources, and profitability, expect Singapore’s big three banks to be among the most prominent players in the development of financial tech in Singapore, the region, and beyond.
Currency converted from Singapore dollar to US dollar: US$1 = S$1.35.