What is the rationale behind the acquisition of a UK bank?
Acquisition of a UK bank – key details
iFast announced that it has entered into an agreement with its partner, Eagles Peak Holding Limited (EPHL) to acquire BFC Bank Limited in the UK. iFast will have an 85% stake in BFC Bank. The total acquisition amount is £25m (S$46m) which implies a 1.62x P/B. We think that the valuation is on the high side given that large incumbent Barclays, HSBC, and Stanchart currently trades at a 0.4-0.8x P/B. Furthermore, BFC Bank currently offers limited banking services (deposits & remittances), relatively small market share (only 200+ deposit customers), and has been loss-making since operations began in 2017. Nevertheless, iFast mgmt. argues that this premium is warranted to acquire their first banking license, which hopefully will lead to more banking licenses in the future. Aside from the acquisition amount, EPHL will also inject £15m (S$28m) to bolster the capital position of BFC Bank. This acquisition will be funded by a combination of internal funds, bank borrowings and fund raising in the capital markets. The total amount of S$74mn accounts for ~3% of the current iFAST market cap.
Background of BFC Bank
BFC Bank was incorporated in the UK in 2003 but was only fully operational in 2017 after receiving authorisation by the UK regulators. BFC Bank is a full licensed UK bank with money transfer/remittance being its main business. The bank has about 850k remittance customers. As of end 2020, BFC Bank had £43m in deposits with about 200+ customers. BFC Bank does not do lending and therefore does not carry any credit risk. BFC Bank has been loss-making since operations began in 2017. BFC Bank exited the corporate banking business in 2020 citing adjustments in business strategy and risk appetite. Key financial highlights of BFC Bank in Fig 1 below.
Business plan for BFC Bank
In the beginning, online account openings, remittance services, and multi-currency deposits will be the key offerings through BFC Bank. iFAST mgmt. does not plan to introduce lending in the near term, instead preferring to earn the spread (i.e. NII positive) from placing deposits with other banks to remain capital efficient. WM product offering to UK customers is not part of the strategy for now given the requirement of additional licences for the suppliers (e.g. fund houses). In the medium term, the group intends to reintroduce corporate banking services. There will be initial start up losses in 2022 and 2023 (not expected to be significantly higher than the current S$3-4m), with breakeven expected by 2024. The banking license and additional services offered to customers can likely help with a faster path to the S$100bn AUA target by 2028 for iFAST.