Acquisition Of UK-based BFC Bank To Dampen Near-term Earnings

iFAST has proposed acquiring UK-based BFC Bank for a total investment amount of S$73.4m. We see the move as being in line with iFAST moving towards its 2028 S$100b AUA target, and able to provide tangible progress towards its vision of becoming a top fintech wealth management solutions provider with a truly global business model. AUA growth momentum is expected to continue in 4Q21 and into 2022. Maintain BUY with a lowered DCF-based target price of S$9.75.

WHAT’S NEW

Adding UK-based digital bank to iFAST ecosystem. iFAST Corporation (iFAST) has proposed to acquire an 85% stake in UK-based BFC Bank (BFC) for a total investment amount of £40m (S$73.4m). The amount consists the acquisition price of £22.6m (S$41.5m), a capital injection of £15m (S$27.5m) and transaction costs of £2.4m (S$4.4m). The remaining 15% stake will be held by the BFC’s CEO, Mandeep Ahluwalia. BFC is a full licensed bank in the UK. In 9M21, BFC recorded a net loss of £2.2m (S$4m) and has a NAV of £17.8m (S$32.7m), implying a deal valuation of 1.5x.

Why buy a bank? Management believes adding BFC is one of the central components to the iFAST ecosystem. As assets under administration (AUA) for iFAST grow due to the addition of new financial products and new licences in jurisdictions, etc, cash in AUA will inevitably rise in tandem. This is where the two key aspects for any bank – deposits and lending, will be tapped. During the initial stages, BFC will be able to attract deposits from the iFAST ecosystem, which has close to S$1b cash in AUA, 650,000 customer accounts, 540 companies and a network of more than 11,000 wealth advisors. Such deposits can be deployed in a capital efficient manner, earning fee income for BFC without burdening their balance sheet. Eventually as BFC aggregates more deposits, this will provide greater bargaining power in negotiating interest rates for deposits, both within the country and internationally, thereby passing on better rates to their customers. Over the longer term, BFC could provide leverage and product financing for iFAST’s customers, which will in turn improve interest income for the ecosystem. Taking a cue from Charles Schwab (SCHW US, Not Rated), which also has a banking licence, net interest revenue for SCHW accounted for 52% of the business in 2020 (2019: 61%, 1H21: 42%). This compares to iFAST which does not even provide the breakdown of net interest income due to its insignificance.