Can banks reposition themselves as fintech stocks?

Like a middle-aged banker wearing the latest sneakers and baseball cap, fintech makeovers can look a little forced. Previous attempts to turn centuries-old financial institutions into born-again technology companies have often ended in disappointment.

BBVA and ING’s recent sales and closures of international digital-banking businesses are cases in point.

But there is a growing sense, post-Covid, that incumbent financial institutions have no choice other than to try again and fail better, as fintech valuations have mushroomed.

Partly inspired by the growth of digital subsidiaries at Chinese insurance group Ping An, Siam Commercial Bank (SCB) is in the middle of what could be the traditional banking industry’s boldest leap yet in this direction. In November, the 114-year-old lender unveiled a plan to radically reorganize its shareholder structure, to prove just how much it can move beyond its legacy and expand outside Thailand.

SCB’s restructuring will see it delist in favour of a new financial holding company known as SCBX, under which traditional banking and asset gathering will be one of three pillars. A second pillar will house credit cards, auto finance and brokerage. A third pillar will be dedicated to new digital platforms and ventures.

SCB then plans to list the cards business, followed by Ping An-style IPOs of its new tech subsidiaries.

By 2025, SCB aims to have increased customer numbers by more than 10 times, to 200 million. Its market cap should have increased by two and a half times, to Bt1 trillion ($30 billion).

SCB’s shares rose by a third after it announced the restructuring in September. This was a welcome reprieve for a stock hampered by low growth and low interest rates, and previously trading at a discount to book value. Industry insiders are consequently asking which other incumbents could attempt a similar shake-up – including in Europe, where the combination of fintechs and even lower interest rates pose a greater existential challenge.

The question has already come to Bill Winters, chief executive of London-based, Asia-focused Standard Chartered.

At an analyst event in October, Winters declared a medium-term aim to earn half of group revenues from digital initiatives. StanChart is doubling the cash it spends on these initiatives to $1 billion annually. Winters hopes this will propel product distribution so much that its customer numbers increase five-fold by the middle of the decade – the sort of target normally associated with fintechs. But such hopes barely moved the share price.

Largely thanks to low interest rates and legacy costs, StanChart stock trades at a discount to book value of about 60% – low even by European standards. By contrast, the valuations of fintech firms with a fraction of those revenues have far surpassed its market cap.

Particularly given the two banks’ shared presence in Asia, it was logical for an analyst from Autonomous Research to put the SCB holdco idea to Winters.

Winters’ response was that StanChart would publish more detail on the performance of its digital ventures. However, he was not convinced that restructuring would lead to a higher valuation.

“We don’t believe that we can create value or at least realize untapped value simply by moving the deck chairs around and changing the shareholder structure in some way,” Winters said.

Jefferies then sent out a research note saying SCB’s share price proved the CEO was wrong, so StanChart should indeed go down that route: restructure into a financial holding company with investments in traditional banking, credit cards and fintech, the latter housed in SC Ventures.

Jefferies analyst Joseph Dickerson says SCB’s plan has already helped it achieve more of a sum-of-parts valuation. As about half the uplift in SCB’s share price was to do with its cards IPO, Dickerson argues StanChart could similarly unlock value with a listing of its cards business too.

All this talk of spin-offs and IPOs naturally makes investment bankers’ ears prick up.

“A lot of banks are toying with the Siam Commercial Bank approach,” says one adviser to financial institutions at a top-tier investment bank.

Other investment bankers describe frustration among financial institution clients at the lack of attention that investors pay to inhouse digital banks and payment businesses.

Many fear last year’s rebound in bank valuations won’t be sustained, but there’s also a growing sense that traditional bank consolidation no longer makes sense because of the accelerating rise of digital banking. Management consultants are broaching the subject too.

McKinsey’s global banking review in December concluded that getting on the right side of a growing divergence between digital winners and losers is partly about repositioning the investor story.

One way of doing that, it said, could be to move to a new holding company structure that draws a line between older balance-sheet businesses and the parts with more potential for value creation, including tech and growth-focused entities – or at least to report those as if they were ready to spin off.

“Many banks feel a need to build new revenue streams and find value in new opportunities, given there’s so much liquidity, margins are so low and costs are such an issue in the traditional business,” says Joydeep Sengupta, McKinsey’s strategy and corporate finance lead in Asia. “You can do more in wealth and insurance, but maybe it is not enough. They’re looking at building things like data businesses, businesses around exchanges, and carbon trading.”

SCB’s reorganization could therefore be part of a trend, which is if anything more urgent in Europe, where the sector still trades at a discount to book value.

“Banks who have built these newer businesses are now exploring options to unlock their value through spin-offs and new corporate structures, so you bring in new investors, as otherwise value discovery doesn’t happen,” Sengupta says.

While spin-offs are not new to banking, incumbents are increasingly on the lookout for ways to get the market to place more value on their fintech-related businesses – just as they were previously keen to make more of capital-light businesses, especially asset management, in the 2010s.

Majority-owned Crédit Agricole subsidiary Amundi became Europe’s biggest asset manager after its 2015 IPO, for example.

In technology, one of the most successful bank spin-offs goes back 30 years, when Citi spun off its in-house software unit in India, investing $400,000 for a 40% stake in what became i-flex, sold in 2005 to Oracle for $592 million.

More recent tech spin offs are also about putting businesses at arm’s length so industry partners don’t see them as competitors, such as Goldman Sachs’s spin-off of its digital wealth-management platform Simon, in 2018.

Making it arm's length was part of the motivation behind Amundi’s IPO, too.

However, the financial value and strategic importance of fintech-related businesses have grown immensely over recent years – especially in payments, which banks and investors have come to equate with fintech, even when it is an incumbent business.

Banks are consequently awarding fintech and payments divisions much more autonomy and prominence than in previous decades.

In Europe, Banco Santander is one example. It is perhaps the bank that has come closest recently to positioning itself as a sort of holdco for banking and fintech, especially in payments.

In late 2020, Santander launched a new global payments company, PagoNxt – an IPO of which is a clear possibility – to house Brazil-based merchant acquiror Getnet; Latin American low-cost account provider Superdigital; and international trade businesses including recently acquired European fintechs Ebury and Mercury TFS.

It also doubled funds allocated to its venture capital arm to $400 million, granting it more autonomy and rebranding it from Santander Innoventures to Mouro Capital.

Since then, Santander has spent a rumoured $100 million buying technology and talent as part of the restructuring of German e-commerce payments firm Wirecard. And in July 2021, PagoNxt staged a European launch of Getnet – a business widely credited with the outperformance of Santander’s Brazilian bank, particularly in terms of client growth, since it bought the merchant acquiror in 2014.

These investments reflect a renewed appreciation of the importance of fintech and payments at Santander; payments is now the unambiguous core.

Much like SCB, Santander is determined for the market to see PagoNxt and Mouro Capital as fintech businesses doing their own thing, without the drag of traditional banking.

Javier San Félix, PagoNxt’s chief executive, tells Euromoney that his firm is “trying to blend the best of both worlds” in terms of the bank’s client reach, but with enough separation to roll out new technology rapidly – much in the manner of a standalone fintech player.

Santander is far from the only big incumbent trying to use the aura of fintech to boost its valuation, including by setting up separate new businesses. UK lender NatWest, for example, launched new merchant-acquiror business Tyl in 2019. Around the same time, it launched Mettle, a digital bank for small and medium-sized enterprises, and Bó, a digital consumer bank.

Although Bó became a notorious bank-bred failure, Tyl’s launch was particularly poignant because the European Union forced Royal Bank of Scotland, as NatWest was known at the time, to sell Worldpay as a state-aid condition of its 2008 bail-out.

In 2019, nine years after RBS received £2 billion for Worldpay, FIS bought it for £32 billion, more than NatWest’s entire market cap.

When their in-house neobanks are successful, incumbents can be frustrated at the lack of value investors place on them, given that independent neobanks are gaining sky-high high valuations.

In Revolut’s most recent funding round, for example, the UK neobank achieved a valuation about the same as the market cap of NatWest and about twice that of StanChart, despite the latter earning about 60 times more revenue.

This is part of the reason why Jefferies thinks a holdco model could work for StanChart. Mox, a new cloud-based Hong Kong neobank in which StanChart owns a majority stake, is the most valuable part of SC Ventures, worth about £200 million, according to Jefferies. It has about 175,000 customers. In addition, StanChart’s African digital banks have attracted some 700,000 customers, while it is soon to launch another in Singapore.

The frustration is even greater in Brazil, where loss-making digital challenger Nubank achieved a market cap of almost $50 billion at its December IPO. That is bigger than Brazilian incumbents Itaú and Bradesco, both of which have launched inhouse neobanks with millions of new customers and still earn tens of billions of reais in profit from the legacy business every year.

It is an open secret that Bradesco would like to do an IPO of its neobank, Next.

One problem is that fintech investments such as neobanks are a bet on the future, whereas investors look to incumbent banks because they’re cash-generative, even if low growth.

A more distinct and clearly reported structure, says McKinsey’s Sengupta, can bring clarity about what exactly the bank is building in fintech. It can also ease culture clash between the mindsets and skillsets involved in traditional banking versus fintech, where the business might house more tech staff than bankers.

That said, there’s a deep-seated belief among investors that bank stocks are the inverse of fintech firms.

One characteristic buy-side view comes from Julian Wellesley, financials equities analyst at Loomis Sayles. Despite banks’ boasts that they can plug in more services than payments specialists, the fastest-growing fintech companies are not those owned by banks, he notes. That is largely because banks are so heavily regulated, because they fulfil important social functions, according to Wellesley.

“Banks have an odd mixture of private and public roles,” he says.

Loomis Sayles’ global equity opportunities team has consequently tended to look more at non-banks, especially tech-orientated payments companies, even if they are much more expensive than banks.

“Investors don’t like companies that are losing market share,” Wellesley comments.

The prevalence of this view is why SCB, whose biggest shareholder is Maha Vajiralongkorn, the king of Thailand, is so determined to change its image as Thailand’s oldest bank.

SCB executive chairman Arthid Nanthawithaya told investors at the time of its restructuring that, by 2025, SCB will “no longer be a bank”, rather it will be a conglomerate with a much more diverse array of digitally based financial services.

SCB, said Nanthawithaya, must “take advantage of its financial strength to accelerate its aggressive expansion into other types of financial businesses”.

This is very similar to the path of Ping An – China’s largest private-sector conglomerate by revenues, founded in Shenzhen in 1988, has previously used earnings from established businesses to launch new digital platforms, including businesses in consumer lending and wealth management (Lufax) and healthcare (Good Doctor).

Its venture capital arms have invested in a wide array of Chinese and international fintech players, from Israeli digital broker eToro to UK cloud-banking transformation firm 10x.

Ping An is also an antecedent to SCB in the way it has listed some of these subsidiaries.

SCB’s holdco structure is designed to help it invest more aggressively, like Ping An, in international venture capital and organically developed digital platforms.

SCB already has one venture capital arm, SCB10X, co-leading a $310 million funding round for US digital asset platform Fireblocks in July, for example.

SCB’s restructuring announcement came with further news of another fintech fund of up to $800 million, alongside Charoen Pokphand Group, Thailand’s biggest conglomerate.

SCB, in addition, has already built new digital businesses in-house, such as Thai food delivery app Robinhood. In 2020, it partnered with Chinese tech firm Abakus to launch Monix, offering app-based loans to low-income Thais. Most recently, in November 2021, SCB Securities announced the acquisition of Thai digital asset exchange Bitkub, showing that crypto and blockchain technology are very much part of its fintech push.

Nowadays, almost every big bank has some sort of venture capital investment in fintech, often to compliment inhouse fintech projects. One could look at Citi, whose ventures arm has a portfolio of about 100 companies.

And SCB is far from the first to take Ping An’s transformation as an inspiration.

Andrea Orcel is one of the best-known figures in the European banking industry and a former financial institutions investment banker. When he became UniCredit chief executive in April 2020, he paid Ping An the compliment of hiring one of its former top executives, Jingle Pang. As the Italian bank’s new chief digital and information officer, Pang was Orcel’s only external executive hire with whom he hadn’t worked at UBS.

UniCredit is now reinternalizing technology, based on the premise that – like Ping An – it too can build agile and innovate businesses of its own.

Nevertheless, SCB’s holdco approach is new and worthy of attention, particularly because of the way it could facilitate a redeployment of excess capital, which many banks now enjoy, into higher-growth and higher-return activities – and more effectively so thanks to ringfencing the bank from the risks associated with these investments.

Indeed, this is one of the benefits to which McKinsey alludes when talking about the utility of the type of holdco approach SCB is taking.

SCB’s capital ratio, about 18%, is one of the highest in its region. The Bank of Thailand will regulate SCBX. However, SCB chief financial officer Manop Sangiambut tells Euromoney that non-bank subsidiaries won’t be subject to bank-specific capital rules anymore. Moreover, people with more specific knowledge will have more influence over the underlying businesses, based on the rationale that different industry subsets require different mindsets and risk-return calculations.

“The bank will upstream dividends to SBCX as a mothership company, and SCBX will redistribute or invest this capital to different businesses and growth subsidiaries,” explains Sangiambut. “When we invest this excess capital to the new subsidiaries under SCBX, each of these subsidiaries will have their own governance structure and risk appetite, which could be different from the bank’s risk appetite, which is quite rigid and low-risk, low-return.”

Credit cards, for example, will become more of a high-return lending product rather than the transactional product it was in the bank, necessitating a step-up in the efficiency of collections and risk modelling.

Remunerating staff based on the valuation of the subsidiary not of the bank, eventually in shares, should further help by attracting in-demand fintech talent.

But is it possible to retain the good aspects of highly regulated traditional banks – in terms of their core function as a trusted store of wealth – at the same time as having all the excitement and growth of tech?

This, indeed, seems to be what SCB is aiming for. Its first pillar, containing the bank, also contains asset management, insurance and a joint venture with Swiss wealth manager Julius Baer. That pillar is for low-risk and low-growth, cash-generative businesses.

Other banks haven’t gone quite so far in turning the shareholder structure upside down in this way. But they too are also making new efforts to emphasise their fintech side – whether it is new investments in payments or cloud-based neobanks – at the same time as holding onto their history, with an eye especially on their wealth management franchises.

JPMorgan’s launch of Chase UK in September, part of its ambition to build a global digital retail bank, has attracted international attention.

There are plenty of others. Think of SEBx, the innovation hub for SEB, which is the big Swedish bank traditionally most focused on corporate banking and wealth management. It launched Uniqlo, a mobile banking platform for sole traders, and is a shareholder in Thought Machine, a UK-based, core-banking fintech of which Lloyds Banking Group also owns part.

It is perhaps easy to get the impression these initiatives are doing similar things, when you put the Xs and 10s together (SCBX, SEBx, SCB10X, 10x).

The naming can be a little trite, but there are serious goals – even if it is only to test crucial new technology, such as cloud-based banking.

Thanks to SCB’s restructuring, Sangiambut says the listed vehicle’s published return on equity will rise from below 10% to mid or high teens within five years.

“Investors see SCB as a value stock,” he says. “We have stable profit, low returns, and a low valuation. With this restructuring, we are adding more growth elements into the group, and we hope that we will become more of a growth-orientated stock.”

Some remain sceptical, partly because of the operational complexity of disentangling such businesses from the rest of the group. Jefferies’ Dickson admits this would be difficult for StanChart to do to its cards business.

Others voice doubt about the prospect of transferring old IT systems onto the newer platforms of inhouse neobanks (something Santander previously seemed to be considering for its Spain-based digital lender Openbank).

Above all, changing the base of value- and income-orientated investors that big old banks attract seems ambitious.

“There’s no sum-of-parts approach to a big bank,” argues one financial institutions banker. “The standalone neobanks are venture capital investments, in which it is all about growth and not about proven profitability.

“When clients say to me: ‘My digital bank is as good or better than N26 or Starling,’ I say: ‘Tough luck, you trade on a price-to-earnings basis. If you invest more in the digital bank and you have losses, it is not going to add $3 billion or $4 billion to your market cap, it is going to be negative.’”

The banker gives the example of BBVA’s six-year-old investment in Atom Bank. Far from adding to BBVA’s market cap, he says it is has taken away value, because the UK challenger has consistently lost money.

SCB, however, is not the only bank around the world to have recently switched to a more fintech-orientated listed holdco in which the bank would be only one part.

Access Bank and Guaranty Trust, respectively Nigeria’s biggest banks by assets and market cap, are doing precisely that – separating new payments and wealth gathering businesses, delisting the bank, and putting all three under a newly listed holdco.

Moreover, they are doing it for reasons similar to SCB's: to step up growth in customer numbers in the face of growing fintech and telecoms rivals.

Bear in mind that Africa, and above all Nigeria, is one of the hottest markets for fintech globally.

In the past two years, following the success of mobile money services such as Kenya’s M-Pesa, payments firms Network International and Stripe have bought African rivals DPO and Paystack, respectively, at valuations above all but the biggest of African lenders.

Nigerian payments company Flutterwave’s $1 billion valuation in its March funding round, led by Avenir and Tiger Global, far surpasses Access’s market cap.

Now Flutterwave is rumoured to be in talks for another funding round at a $3 billion valuation, about twice Guaranty Trust’s market cap, despite the latter having about half a million merchant relationships versus Flutterwave’s 290,000 at the time of its last funding round.

Switching to a holdco is part of the fightback, GT’s chief executive Segun Agbaje told Euromoney before the bank completed its corporate reorganization last July. That’s because, even in a relatively underpenetrated market such as Nigeria, banks have such different growth and risk profiles compared to businesses such as payments.

“The only fintech I want to partner with is my own,” Agbaje said.

Given these examples are all in emerging markets, does it suggest this sort of structure makes less sense in developed markets, where legacy balance-sheet businesses are so much bigger, potentially making such a similar structure look lopsided? After all, SCB’s cards revenues are about half those of the bank, data from the Jefferies report shows. The equivalent proportion at StanChart would be about a 10th.

Rebranding a developed-market bank could also be harder, as their legacy IT systems are so much bigger. It is for this reason that banks in central and eastern Europe, such as Sber and the Turkish private banks, are often said to have transformed more successfully than those in Western Europe.

Many, including McKinsey’s Sengupta, agree the viability of an SCB-like restructuring will depend on the bank’s precise stage in its digital journey.

“It makes for a nice presentation, but it is too complicated and gimmicky,” says the sceptical financial institutions banker. “Investors believe the SCB story, but it was already ahead in its transformation and venture capital investing, so it can force a sum-of-parts valuation.

"In Europe and the US, the digital part is relatively small. If Mox has a value of $200 million, what’s the impact on StanChart’s market cap? Probably zero, and certainly not enough to justify such a restructuring.”

For banks based in Europe and the US, including StanChart, the solution could be to argue for the benefit of investing in fintech-type businesses – and get them recognized in a more positive manner – by giving more detail on the performance and goals of these businesses.

That is the case at Barclays. A few months before he quit as Barclays chief executive in November, Jes Staley told Euromoney about a pre-pandemic meeting with Patrick Collison, Stripe’s founder.

“I’m flying commercial, but he not only has his own jet, he’s flying his own jet,” Staley complained, half joking.

But the biggest frustration was that Barclays’ market capitalization was about 40% of Stripe’s $95 billion valuation, in the latter’s latest funding round. This has spurred Barclays to alert investors more to its payments revenues and to set out a new aim to grow its payments revenues by £900 million to £2.6 billion in three years, way faster than most other areas of its business.

Barclays has about a million small-business customers and about 35 million consumer clients, thanks to its large international and domestic credit card business, so it should be able to make much more of things like merchant acquiring. Or, at least, that’s the thinking.

The mere suggestion of spin-off could be anathema for a bank such as BNP Paribas – not because it is neglecting or micro-managing fintech investments, but because its pitch to investors is so much about the benefit of conservatively managed diversification.

After all, what’s the point in owning something if it is not fully tied in with the rest of the business?

In general, the French banks have done less to amplify their payments activities compared with British and Spanish firms, or to sell them, as the Italians and Nordics have done. As such, it is harder to say their market capitalizations incorporate the value of those activities.

At Crédit Agricole, France’s biggest retail bank, internal politics could prevent an Amundi-style spin-off of payments because the regional mutual banks have more control over it than the central listed vehicle.

Over the past year, however, Societe Generale has shone more of a light on its online-only retail bank, Boursorama, as it seeks to retell its investor story – previously dominated by cuts.

In January, SocGen also announced the €4.9 billion merger of LeasePlan with ALD, the auto-leasing business the bank listed in 2017.

Vehicle leasing, in fact, is also part of SCB’s reorientation too. In October, it launched a new auto-leasing business, Alpha X, alongside local retailer Millennium.

SocGen chief executive Frédéric Oudéa said ALD, still majority owned by SocGen, would become “a third pillar” for the group, alongside retail banking and insurance, and wholesale banking.

Boursorama was, originally, an online stockbroker and is more than three decades old, but its growth as a full-service digital bank has accelerated over the last five years. In late 2020, SocGen set out its aim to increase its customer numbers by 1.5 million by 2023, to reach four million in total, by which time the unit should be profitable and on track to earn a 25% return on normalized equity by 2025.

As Euromoney went to press, SocGen was reportedly bidding to merge Boursorama with one of its biggest rivals, ING France, as the Dutch bank sells some of its digital firms.

This stands in marked contrast to UniCredit’s late-2010s decision to sell multi-channel bank Finecobank – a decision some now regret.

“It is a scale game, because we have also shown that we can decrease the cost-to-serve,” SocGen’s then chief financial officer William Kadouch-Chassaing told Euromoney, when it announced the new strategy for Boursorama – repeating a rationale that venture capital firms often cite for investments in loss-making but fast-growing standalone digital banks.