Digital licences no threat to conventional banks

PETALING JAYA: Bank Negara’s awardment of digital banking licences to five different consortiums will not pose a significant threat to the incumbent banks for now, say banking analysts.

Public Investment Bank’s research unit said the local banking industry was “at the dawn of a new era”, with the inaugural digital banking licences.

It reckoned that it would be a while before they would able to challenge the incumbency of the traditional banks with many of the latter having already embarked on digitalisation, in line with the evolving landscape.

“The digital banks’ primary focus on the unserved and underserved segments may come at the expense of profitability, although it must be noted that they are also likely have greater cost advantages, “ Public Investment said.UOB Kay Hian Research, in its report to clients yesterday, also said it believed that the five digital bank licence winners were unlikely to pose a major threat and will be able to exist “harmoniously” with the conventional banks.

“Firstly, the primary role of the digital banks is to address market gaps in the underserved and unserved segments, which are not the key focus of the traditional banks.

“Secondly, the assets of the five combined digital banking licensees (at RM15bil) may shave away less than a 1% share of the laon system, which is insignificant.

“We estimate that every 1% slowdown in loan growth could reduce sector earnings by 0.3%.

“Thirdly, conventional banks have already equipped themselves digitally by embarking on digital transformation projects,” it said.The research house also said that considering the traditional banks’ bigger balance sheets, they had more budget capacity on an absolute monetary basis to spend and innovate compared with the digital banks.

Last Friday, Bank Negara noted in a statement that three out of the five successful consortiums were majority-owned by Malaysians namely Boost Holdings and RHB Bank Bhd, Sea Ltd, YTL Digital Capital Sdn Bhd and KAF Investment Bank Sdn Bhd.

Governor Tan Sri Nor Shamsiah said the digital banks were expected to further advance financial inclusion.

“By adopting digital technology more widely for everyday transactions, we can significantly increase opportunities for our society to participate in the economy – by overcoming geographical barriers, reducing transaction costs and promoting better financial management,” she said.

In its report, CGS-CIMB Research also did not expect the digital banks to pose a significant threat to the businesses of incumbent banks in the next three to four years.

The asset size of the digital banks is limited at a maximum of RM3bil per bank within three to five years after its inception.

It noted that RHB Bank was the only Malaysian bank that had secured a new digital banking licence (through its joint venture with Boost).

“This would be negative for RHB Bank in the short term due to the potential operating losses over the next two to three years from its new digital bank,” CGS-CIMB Research pointed out.However, it noted that the potential net loss per year would be small – assuming a RM30mil to RM50mil yearly net loss for its digital bank (against a minimum paid-up capital of RM100mil for digital banks), RHB Bank would only suffer a net loss of RM12mil to RM20mil from its 40% stake in this joint venture, accounting for only 0.3% to 0.6% of the research house’s projected FY23 net profit for RHB Bank.

It expected the venture to be positive for RHB Bank in the longer-term when its digital bank turns profitable.

“Furthermore, it can learn the ropes of running a pure digital bank, which could help it to improve its existing operations.”

Public Investment, in its note, said short-term volatilities notwithstanding, the expected rate normalisation this year and economic recovery would bring about asset quality improvements, loan growth and margin expansions to the banking sector.

It is maintaining its “neutral” view on the sector.

“For sector exposure, we like Malayan Banking Bhd and CIMB Group Holdings Bhd.”

Most research houses are maintaining a “positive” outlook on the banking sector.