Why I’m excited about iFAST buying BFC Bank

iFAST has bought a UK digital bank!

From iFAST:

On 6 January 2022, the Group signed an agreement with its partner, Eagles Peak Holding Limited (“EPHL”), to acquire BFC Bank Limited (“BFC Bank” or ”UK bank”) from BFC Group Holdings (“BFC Group”, based in Bahrain). The Group will have an 85% stake in BFC Bank. BFC Bank has the requisite banking licence in the UK.

The Proposed Acquisition in the UK bank will allow the Group to acquire a banking licence in the UK, a reputable jurisdiction and a global financial centre.

The Group sees synergy in adding the bank’s capabilities into its existing digital wealth management platform, strengthening its vision to become a truly global wealth management business and opening up other opportunities in the future.

The acquisition after some technology upgrades, will allow the Group’s clients in its current eco-system across the various Asian markets to have access to online account opening, multi-currency deposits, remittances and cross-border transactions, and Banking as a Service (BaaS).

iFAST presentation on 7 January 2022

Although iFAST’s share price reacted poorly to the proposed acquisition, I think buying a UK digital bank is a game-changer for iFAST and I’ll be looking to add on further weakness.

There’s a lot to like about this deal although there are some risks:

Good

  • Clean balance sheet and no credit risk from BFC Bank
  • Doable turnaround plan
  • Game-changer synergies from digital banking

Bad

  • Potential dilution from capital raise
  • Losses from BFC Bank

Let’s start with the good points!

Clean balance sheet and no credit risk

BFC Bank has a clean balance sheet. Assets mainly include cash while liabilities mainly involve customer deposits. BFC Bank does not make loans so there’s no risk of credit provisions.

Doable turnaround plan

iFAST’s turnaround plan for BFC Bank sounds doable. BFC Bank is incurring losses now mainly because the bank has no loan book and its customer deposits are idle. iFAST has plans to earn interest income from these deposits by leaving these deposits with another bank. This is a similar system to what iFAST is already doing with its cash account service. I’m somewhat surprised that BFC Bank’s existing management didn’t think of this idea first. Does anyone know of any show-stoppers to this idea?

iFAST already has a UK management team in place, led by CEO, Mandeep Ahluwalia, a UK citizen with 25 years of banking experience from Lloyds Banking Group, Standard Bank, ABN AMRO and Royal Bank of Canada. Mandeep will own a 15% stake in BFC Bank so he clearly has skin in the game. 

Game-changer synergies from digital banking

Over the long term, BFC Bank could be a game-changer for iFAST and is part of iFAST’s vision of becoming the Netflix of wealth management. Like Netflix, iFAST aspires to be a  platform serving customers globally from only a few locations. After securing regulatory approval, iFAST can offer digital banking services such as online bank account opening, multi-currency deposits, remittances and cross-border transactions to Asian clients. This is a huge deal for a few reasons.

iFAST ecosystem

First, depositing money into a bank account is the starting point for wealth management which typically results in banks being market leaders. Managing and understanding a customer’s cash deposits will allow iFAST to better cater to their wealth management needs (eg. offering bonds or a money market fund to customers with large cash deposits).  Second, iFAST’s Asian customers (particularly clients in countries facing capital controls!) would appreciate a bank account in the United Kingdom, a trusted jurisdiction and a global financial hub. Lastly, owning a bank, the “operating system” of the financial industry allows iFAST to streamline the entire wealth management process and brings them one step closer to their customers by managing their idle cash deposits. In short, a digital bank will allow iFAST to add customers globally at a faster pace.   However, this is a long term vision and will require a long regulatory approval process.  My guess: it will take 2 years before iFAST’s Asian clients can start benefiting from BFC digital banking services.

Bad

Potential dilution from capital raise

iFAST said the total investment for BFC bank would involve SGD75 million (GBP40 million) with funding from internal funds, bank borrowings and capital markets. There’s a risk of equity dilution here because iFAST only has SGD54 million of net cash as of end-September 2021. However, a SGD75 million investment makes up 3% of the company’s market cap so any equity dilution should be minimal.

BFC Bank losses in 2022 and 2023

BFC Bank incurred a SGD3.4 million loss as of 9M 2021 and is expected to incur start-up losses in 2022 and 2023. I think these losses are a necessary evil but iFAST can probably afford it given the boost in profitability from their Hong Kong ePension segment during this period.

In short, buying a UK digital bank will lead to some equity dilution and losses in the near term but this gamble could be a game-changer for iFAST. Having a digital bank is the start of iFAST’s vision of becoming the Netflix of wealth management and offering online bank accounts and wealth management services to customers globally. What do you think? Will love to hear from anyone with banking experience! 

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