Digital banks not a major threat to conventional counterparts, say analysts

Digital banks not a major threat to conventional counterparts, say analysts
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KUALA LUMPUR (May 5): The recently announced digital banking licence winners are not seen as major threats and can co-exist with their conventional counterparts, according to analysts.

On April 29, Bank Negara Malaysia announced the five successful applicants for the digital banking licences, namely a consortium of Boost Holdings Sdn Bhd and RHB Bank Bhd; 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 Services Co Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc; and a consortium led by KAF Investment Bank Sdn Bhd.

In a note on Thursday (May 5), Hong Leong Investment Bank (HLIB) Research analyst Chan Jit Hoong said that based on trends seen in China and South Korea, the successful digital banking licence winners can co-exist “quite harmoniously” with conventional banks.

“Firstly, their primary existence is to address market gaps in the underserved and unserved segments, which to begin with are not the playground of classical banks. 

“Secondly, the assets of the five combined digital banking licensees (RM15 billion) could potentially shave away only less than 1% share of system loans, which is insignificant. We estimate every 1% slowdown in loan growth could reduce sector earnings by 0.5%.

“Thirdly, conventional banks have already equipped themselves ahead of time by embarking on digital transformation projects to shift away from outdated business paradigms. Given the archaic banks’ bigger balance sheet, they have more budget headroom on an absolute monetary basis to spend and innovate versus digital banks,” Chan said. 

The HLIB Research analyst noted that the beneficiaries under his coverage are Axiata Group Bhd (hold; target price [TP]: RM4.03), RHB Bank (buy; TP: RM7) and YTL Power International Bhd (buy; TP: RM1.05).

“While prospects are bright, we resist the temptation to model in digital banking contributions and valuation for the trio before finding out more about their business plans and strategies,” he added.

He also maintained his “overweight” call on the banking sector given that the digital banks are not expected to be major threats and can co-exist with their conventional counterparts.

“Thus, we continue to opine that the sector’s risk-reward profile is still skewed to the upside as valuations are undemanding and we are only on the cusp of an OPR (overnight policy rate) hike upcycle with economic recovery, which benefits banks,” he added.

Likewise, CGS-CIMB Research analyst Winson Ng said that he does not expect the new digital banks to pose any “significant” threat to the businesses of incumbent banks in the next three to four years for the same aforementioned reasons.

Ng added that RHB Bank — via its joint venture with Boost —  is the only Malaysian bank that had secured a digital banking licence, and noted that this would be negative for the bank in the short term, but is expected to turn positive in the longer term.

“This would be negative for RHB Bank in the short term due to potential operating losses over the next two to three years from the new digital bank. 

"We expect the venture to be positive for RHB Bank in the longer term when the 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,” he said.

Ng maintained his “overweight” call on the banking sector as he said the research house does not expect the issuance of the new digital banking licences to materially alter the competitive landscape of the sector over the next three to four years.

“Our sector top picks are Hong Leong Bank Bhd (add; TP: RM21.80), RHB Bank (add; TP: RM7) and Public Bank Bhd (add; TP: RM5),” he added.

Meanwhile, UOB Kay Hian Research analysts also opined that the successful digital banking licence bidders are unlikely to pose a major threat and will be able to co-exist harmoniously with conventional banks.

However, they noted that there could be a short-term share price uptrend for the awardees in view of potential additional income sources for the companies, but do not expect an immediate earnings impact on the companies given the expected two- to three-year gestation period for the digital banks to turn profitable.

“Given the marginal near- to medium-term value accretion, coupled with an expected two- to three-year gestation period (the average period for digital banks in South Korea and China to be profitable was two to three years), we think that any near-term spike in share prices could be short-lived,” they said.

UOB Kay Hian Research maintained its “buy” call on RHB Bank with a TP of RM6.90, and also maintained its “hold” call on Axiata with a TP of RM4.

Read also:
Digital bank licence winners pare gains amid profit-taking
High turnover among banking stocks despite minimal changes in share prices
BNM awards digital banking licences to Boost-RHB, GXS Bank-Kuok Brothers, YTL-SEA, AEON-MoneyLion, KAF Consortium

Surin Murugiah