No immediate competitive impact from digital banks, says Kenanga

KUALA LUMPUR: The entry of digital banks into Malaysia's financial sector does not pose any immediate challenge to the operations of existing banks given the time taken to set up and the smaller scale of operations than the conventional banks, says Kenanga Research.

In a note, the broker said the digital banks' operations will fall shy of that of conventional banks given their total asset cap of RM3bil during their three to five years foundational phase upon launch.

In addition, the digital banks, which were announced as winners of the licences last week, are yet to enter into the market, and have up to 24 months to commence operations of the proposed digital banking units.

"We maintain our 'overweight' call on the banking sector for now, as the new digital banks are not expected to result in any immediate competitive impact to the banking space," said Kenanga.

On the digital bank licencees, Kenanga said there were some surprises among the winning parties.

"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.

"KAF’s inclusion was an unexpected twist as information regarding the investment bank’s application and details of its consortium partners are scarce.

"We were also surprised to see MoneyLion joining hands with the AEON Group as they were thought to be a separate applicant, suggesting that BNM could have called for more partnerships to enhance the skillsets and longevity within each consortium, it added.

Meanwhile, Kenanga said the establishment of digital banks will benefit the country's financial landscape over the long term.

It noted that the key initiatives for digital banks are to enhance financial inclusion of unbanked/underbanked and unserved/underserved communities and increase overall accessibility to financial services.

"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," it said.

Kenanga said RHB Bank is one of its top sector picks as it develops its digital banking unit, which could boost interest among investors.

Its other top sector pick is Hong Leong Bank, which it favours for asset quality safety.