I was interviewed on MoneyFM 89.3 this morning about the recent big news involving iFAST acquiring a digital bank, BFC Bank. Here’re some key points for investors who are following this development.
First of all, I would give some credit to iFAST for taking a big step to becoming a global company. This is the first time iFAST has ventured out of Asia and are getting a foothold in the UK. It is rare for a Singapore company to go global.
Of course, a lot more has to be done to become a truly global company, but who says we can’t celebrate every milestone along the way?
An interesting question asked by the hosts of 89.3’s Breakfast Huddle, Elliott Danker and Bharati Jagdish was:
“Why did iFAST acquire a bank in the UK and not in Asia?”
The following are my opinions, I think they’re doing this for two reasons:
1 – Greater likelihood of launching a digital bank in Asia
iFAST has presence in the region and has applied for digital banking license in Singapore, Hong Kong and Malaysia. Unfortunately iFAST didn’t succeed in SG and HK, although it is still in the running for Malaysia’s license.
Hence, iFAST probably felt that they were ready to launch a digital bank in Asia, instead of having to acquire one.
It could also be that there isn’t a suitable target in Asia, even if iFAST wants to acquire one. Digital banks are pretty new in Asia and there aren’t many existing ones for purchase.
2 – Gaining a foothold beyond APAC
iFAST had no presence in Europe previously and buying a digital bank in UK would give them a foothold in that region quickly.
The digital banking culture is stronger in the UK than in Asia and iFAST can learn the ropes from BFC. This could even increase the chance of iFAST getting a digital banking license in Asia, considering that they would now have the experience of running one.
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So, why is iFAST so keen on acquiring a digital bank?
iFAST calls the banks the ‘foundation layer’.
Here’s my interpretation.
Deposits are often a customer’s first interaction with the finance industry and there are many more depositors wanting to open a bank account than an investor opening a wealth management account. Every investor needs a bank account but not every depositor needs an investment account.
The acquisition of a depositor is easier and cheaper than an investor. Many banks subsequently develop the trust and relationships with the depositors and can cross sell other financial services and products to them.
With a digital bank, iFAST could do the same and widen its customer base more cost efficiently. In other words, iFAST could expand its total addressable market significantly.
But BFC is losing money!
Some investors are concerned about the losses of BFC and feel that a 1.62x PB valuation is on the higher side (comparatively, Barclays is at 0.5x).
There will be some short term drag on iFAST’s results but the other business segments in Asia are growing strongly (>30%). This means iFAST could easily be profitable and cover the losses in their BFC acquisition.
For example, iFast’s ePension business in HK would give iFAST a significant boost to its financial results from 2023-24 onwards.
I don’t expect BFC to contribute to iFAST nor see any synergy being formed in the next few years.
Would iFast’s share price be affected by the acquisition?
My take is that the share price has done very well in the past two years (up by a few folds) and a lot of the future growth has already been factored in the share price today.
Hence, I don’t see the share price as undervalued even though a handful analysts were calling for a target price of $11. They might be right and the share price could edge towards that target but as an investor, I would demand more margin of safety.
I would hold or take partial profits if I have bought the stock at cheaper prices though.
Disclaimer: I am not a licensed professional. Please don’t take my words as financial advice or recommendation. Build your own views and make your own decision.
p.s. I’ll be sharing how we valuate growth companies at my upcoming free webinar, click here to join me.
