New digital banks will complement incumbents

PETALING JAYA: The entry of new digital banking players is not expected to pose a threat to incumbent traditional banks in the near to medium term.

The new players, which are not-bank based, may, on the other hand, complement the incumbent banks to help enhance the range of financial products and financial inclusion of the underserved market.

UOB Kay Hian said despite digital banks having a potential edge on paper, the asset cap in the foundational years and the fact that operationally, digital banks could only focus on the underserved market would help contain the perceived medium-term threat to traditional banks.

“Based on the combined RM15bil asset size cap, this equates to less than 1% of total system loans and deposit base.

“As such, we opine that the disruption from the five new digital banking players is likely to be muted and these banks should be able to exist together with the traditional banks to help enhance the range of financial products and financial inclusion of the underserved market,” the research house said.

Even as the deadline (June 30) for interested parties to submit their application for the five digital banking licences looms, it gathered that most traditional banks may decide not to participate.

Among the banks, it said only RHB-Axiata has submitted a joint bid for the digital banking licence, while CIMB is still assessing, and would likely use Touch ‘n Go as the vehicle to apply for the licence, if it does.

This does not come as a surprise as traditional banks are already embarking on their respective digital initiatives coupled with the fact that their existing licences allow them to compete in the same space as digital banks, it added.

UOB Kay Hian said the Covid-19 pandemic would prompt banks to fast-track their respective digital banking transformation progress as consumers become more accustomed to the new normal such as stringent social distancing SOPs.

The pandemic has prompted Bank Negara to accelerate the adoption of electronic-Know-Your-Customers (eKYC) from June 20 onwards, which allows the onboarding of customers without them having to visit branches.

The central bank is looking to issue up to five digital banking licences to qualified applicants.

The business model should be focused on serving the underserved market.

The combined assets of the five digital banks would be capped at RM15bil (RM3bil each) for the first three to five years of commencement of operations (known as the foundational phase).

Further, applicants must maintain a minimum total capital ratio of 8% and a minimum paid-up capital of RM100mil.

Beyond the foundational phase, the asset limitation cap would be uplifted if the applicants have achieved an unimpaired minimum shareholders’ funds of RM300mil, and will also be subjected to the same level of stringent requirement as a full-fledged bank, notably more stringent capital requirements.

The research house said the adoption of eKYC was the first step in paving the way for greater branch rationalisation, as customers no longer needed to visit a branch to open a bank account, adding that this could lead to more banks rationalising their branch networks in the future.

It is maintaining an “overweight” stance on the banking sector and believes all in all, the near- to medium-term threat from digital banks would be benign, and sees the sector’s current consolidation phase as providing an excellent opportunity for investors to accumulate on weakness.

UOB Kay Hian does not believe the current MCO 3.0 would have a major upside risk on provisions, as banks have by far and large built in significant pre-emptive provisions.