Digital banks to compete for deposits

PETALING JAYA: With the five digital banks to begin operations in the coming months, competition for deposits will increase and this could put further pressure on net interest margins (NIMs) of conventional banks, says UOB Kay Hian (UOBKH) Research.

Of the five digital banks granted licence by Bank Negara, Grab-led GX Bank has officially been launched, while Boost Bank and AEON Bank are still in alpha testing mode, offering services exclusively to a select group of customers before a full launch.

Meanwhile, SEA-YTL and KAF digital banks have yet to launch their services.

According to the research firm, GX Bank is setting the bar high for deposit rates with a daily interest rate of 5% per year and with non-campaign rates at 3% a year.

In comparison, conventional banks are offering lower fixed-deposit campaign rates of 3.60% to 4.10% for tenures of three to 12 months and non-campaign interest rates ranging from 2.65% to 2.70% for similar tenures.

This, it said, could keep overall deposit competition elevated but not irrational.

“As other digital banks commence full operations, we anticipate they will also offer competitive deposit interest rates calculated on a daily basis.

“This expectation is due to the importance of deposits in fuelling asset growth, particularly for new digital banks in their initial operational stages,” added UOBKH Research.

However, with digital banks required to maintain assets of less than RM3bil and a minimum capital fund of RM100mil, the total potential deposit pool amounts to only RM14.5bil, representing less than 1% of the total banking system’s deposit base.

The research firm said this limitation should help mitigate overly irrational competition for deposits among conventional banks.

Given the near-term deposit competition from digital banks, coupled with competition among conventional banks in certain lending segments such as mortgages, UOBKH Research expects 2024 sector NIM to remain slightly challenged with a potential downside risk to its current flattish outlook.

“Overall, we project the sector’s NIM at 2.05% in 2024 compared to pre-pandemic levels of 2.10%, even as the overnight policy rate has normalised to its pre-pandemic levels.”

The research firm said valuations of banks have risen to a historical mean price-to-book (PB) of 1.10 times, which appeared fair against the forecast return-on-equity (ROE) ratio of 10% and earnings growth of only 6% versus its FBM KLCI earnings growth assumption of 11%.

CIMB Group Holdings Bhd remains the research firm’s sector stock pick although its shares have risen sharply. The stock’s risk-to-reward remains tilted to the upside, backed by a promising ROE trajectory of 11.5% in 2024 as compared to the sector ROE of 10.5%.

UOBKH Research noted that CIMB’s current valuations of 0.98 times 2024 PB is still lower than the sector’s 1.10 times.

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