The financial sector represents both the pulse of the economy (i.e., banks) as well as the forefront of innovation and technology (in the use of online platforms for distributing securities and funds). It is an exciting time for this sector as advances in technological capabilities open up new business models and opportunities for players. At the same time, new challenges and competitors have also arisen due to lower barriers to entry.
Investors looking for exposure to the financial sector should study the competitive moats and risks associated with each company. While some may look promising as they set out to disrupt the incumbents, things may not be that simple as entrenched business models may be difficult to topple, and mindsets are also tough to change.
Here are three financial stocks that can offer excellent long-term growth prospects. In order to present a more balanced view, I have also noted the risks associated with each idea.
1. iFast Corporation Limited
iFast Corporation Limited (SGX: AIY) is a financial technology (fintech) company that operates a platform for the trading, buying, and selling of investments such as equities, bonds, and unit trusts. The group is present in five countries — Singapore, Malaysia, Hong Kong, China, and India — and was one of the earliest fintech companies in Singapore (incorporated in 2000).
iFast earns its revenue from fees charged on the number of assets under administration (AUA) it has, and as of 30 June 2019, its AUA has hit a record high level of S$9.04 billion. The group believes it still has a long runway for growth as its current AUA represents a mere fraction of the total size of the wealth management industry in Asia and that there are many more opportunities to capture some of that wealth. iFast entered China in 2016 and has been building and growing its presence slowly by working with fund houses there. The group also intends to apply for a digital banking license in both Singapore and Hong Kong.
The risks for iFast are that competitors may step up their game and wrestle for a piece of the pie, undercutting iFast’s fees. Another is regulatory risk, as iFast needs to be properly licensed in each jurisdiction before it’s allowed to operate.
2. DBS Group Holdings Ltd
DBS Group Holdings Ltd (SGX: D05) is one of Singapore’s three largest banks. The group offers a comprehensive range of banking services for both consumer and corporate clients. The bank has a presence in 18 markets and employs 27,000 staff.
DBS represents the quintessential successful bank and has grown steadily over the years to where it currently is now. In its recent Q2 2019 earnings release, the bank reported quarterly earnings that were up 17% year on year from higher loan growth, better net interest margin, record fee income, and an improved trading (and investment) performance. Return on equity was impressive at 13.7%.
With growth firing on all cylinders, DBS is a good bet for the future as it continues to build on this momentum to scale new heights. The bank also pays a quarterly dividend of S$0.30 for a historical dividend yield of around 4.5%. Risks include macro-economic weakness due to the prolonged US-China trade war, which may dampen consumer sentiment and spending, as well as the liberalisation of the banking industry with the planned introduction of digital banks in Singapore.
3. Singapore Exchange Limited
Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange and provides a platform for the trading of securities such as equities, derivatives, and fixed income. After a recent corporate reorganisation, SGX looks primed for future growth as its derivatives division powers on. The group is also investing in a fintech company, SmartKarma, to improve on its investment research capabilities.
Risks for SGX include competition from regional stock exchanges such as Hong Kong Exchanges and Clearing Limited (HKSE: 388), and also a market dislocation that may scare away investors from trading, thus affecting securities’ traded volumes.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited, iFast Corporation Limited, and DBS Group Holdings Ltd. Motley Fool Singapore contributor Royston Yang own shares in Singapore Exchange Limited and iFast Corporation Limited.