DIGITAL banks are unlikely to be capable of engaging in long-lasting price competition with incumbent banks before they begin turning profits as this would further deplete their shareholders’ funds which are much smaller than those of incumbent banks.
In this regard, CGS-CIMB Research expects new digital banks to require three to five years to break even or to build economies of scale, hence, are unlikely to start a long-lasting price war within this period.
“With our expectation that these banks will commence operations by 2023-2024F, they would only break even between 2026 and 2029,” projected analyst Winson Ng in a banking sector update.
“We think the digital banks will not be able to engage in long-lasting price competition with incumbent banks before they begin turning profits as this would further deplete their shareholders’ funds which are much smaller than those of incumbent banks.”
On April 29, Malaysia Bank Negara Malaysia (BNM) unveiled the five successful applicants for the digital bank licences which comprised:
- 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 Service Co Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc; and
- A consortium led by KAF Investment Bank Sdn Bhd.
CGS-CIMB Research had earlier hosted Ernst & Young Consulting (EY) partner Ling Kay Yeow to address likely implications following the recent award of five digital banking licences by Malaysia’s central bank.
In EY’s view, the incumbent banks have three options in their strategies to respond to the emergence of new digital banks, namely:
- To build on their existing digital infrastructure;
- Create new digital channels; and
- Create digital-only banks with the existing licence.
“We think that the third option is the least likely to be employed by the incumbent banks due to the additional costs and investments involved as well as financial and reputational risks (if the digital-only ventures fail),” opined CGS-CIMB Research.
All-in-all, the research house reiterated its “overweight” stance on banks by sticking to its view that the emergence of new digital banks will not materially alter the competitive landscape of the banking industry over the next three to four years.
“(This is) especially given the fact that the new digital bank licence winners will be limited to only focusing on the unserved and underserved segment and given the RM3 bil cap on asset size per digital bank within three to five years after incorporation,” CGS-CIMB Research pointed out.
“As such, we are unwavering in our “overweight” call on banks, predicated on the potential re-rating catalyst of continuous earnings recovery in 2022-2023F. Our picks for the sector are Hong Leong Bank Bhd, RHB Bank Bhd and Public Bank Bhd.” – May 18, 2022
