Digital banks a welcome change to the sector
KUCHING: Analysts are generally optimistic about newly announced digital banks as the new segment is expected to stir the operating landscape of traditional banks in the long term as well as push the nation’s overall financial sector to evolve in line with the global financial standards.
Of note, five consortiums have successfully acquired digital bank licences as approved by the Minister of Finance Malaysia.
According to Bank Negara Malaysia (BNM), these companies are; a consortium of Boost Holdings Sdn Bhd (Boost) and RHB Bank Bhd (RHB Bank), a consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd, a consortium led by Sea Ltd and YTL Digital Capital Sdn Bhd, a consortium of AEON Financial Service Co Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc, and a consortium led by KAF Investment Bank Sdn Bhd.
Three out of the five consortiums are majority-owned by Malaysians namely Boost and RHB Bank, Sea Ltd and YTL Digital and KAF Investment.
“We welcome the inclusion of digital banks into the financial sector as while it will likely stir the operating landscape of traditional banks in the long term, it is a necessary step in developing our national maturity in accepting new evolutions (and improvements) in collusion with global standards,” said the research team at Kenanga Investment Bank Bhd (Kenanga Research)
That said, it does not believe they would undermine the investment sentiment of the existing banks as the digital banks would first need to launch into the market.
“According to the licensee conditions, the consortiums have up to 24 months to commence operations of the proposed digital banking units.
“Additionally, their eventual scale of operations would still fall shy in comparison to conventional banks given a total asset cap of RM3 billion during their three to five years foundational phase upon launch,” it added.
Meanwhile, the research team at Maybank Investment Bank Bhd (Maybank IB Research) pointed out that the dawn of digital banking is positive in that it broadens the breath of banking options to both consumers and small businesses, and it believed that they would eventually serve to complement rather than compete with the incumbent conventional banks.
“If anything, there could be heightened deposit competition in the short term, but we do not anticipate much disruption to the operations of the latter,” it opined.
According to BNM, the unbanked population in Malaysia stands at just about eight per cent, which does not seem large.
However, it highlighted: “In the consumer space, we think that the digital banks should focus on wealth management products such insurance/unit trusts, and on creating a virtual financial ecosystem from which they can tap more lucrative fee income.
“They should also tap into the small- to mid-sized SMEs in the country, which would be a higher-yielding segment.”
Overall, Maybank IB Research believe that limited competition is expected in the banking sector despite the emergence of these digital banks.
“A digital bank will undergo a period of operational readiness that will be validated by BNM, a process that is expected to take between 12 and 24 months. It has to maintain an initial minimum capital of RM100 million, which rises to RM300 million after three years, and a total capital ratio of eight per cent.
“During the foundational phase (min of three years, max five years) its total asset size cannot exceed RM3 billion.
“Moreover, the bank is expected to hold Level 1 and Level 2A highquality liquid assets, equivalent to at least 25 per cent of its total on balance sheet liabilities.
“These financial criteria serve to ensure that some level of financial discipline is maintained while ensuring that the digital banks expand at a controlled space.
“What it does mean as well, however, is that the conventional banks are unlikely to face any significant competition in the medium term, while affording them time to ramp,” it explained.
On the consortiums that have successfully applied for the digital banking licenses, Kenanga Research said that the winners were mostly as expected..
“We had advocated for ewallet/e-money players to be strong candidates in the bid for the digital banking licenses. Aside from well-established capabilities to offer digital financial solutions, their pre-existing brand equity and consumer trust could better enable customers to seamlessly partake in budding digital banking offerings.
“Hence, we were not surprised to see Boost, GXS Bank (GrabSingtel’s digital banking entity) and AEON Credit amongst the awardees.
“That said, the inclusion of Kuok Brothers was a surprise albeit a pleasant one as backing from the conglomerate could provide comfort on the consortium’s medium-term financial sustainability,” it said.
All in, Kenanga Research maintained its ‘overweight’ rating while Maybank IB Research retained its ‘positive’ view on Malaysia’s banking sector.
According to the licensee conditions, the consortiums have up to 24 months to commence operations of the proposed digital banking units.
Kenanga Research