THE five new digital banks that have obtained licenses in Malaysia are likely to assume niche market roles rather than disrupt the banking sector in the medium term.
However, digital banks are not likely to become major competitors to traditional banks within the next five years because of regulatory limits placed on their activities, according to Fitch Ratings.
“Bank Negara Malaysia’s (BNM) licensing framework caps the digital banks’ assets at RM3 bil (US$688 mil) during the foundational phase which they cannot exit until at least mid-2026 and potentially as late as mid-2029,” Fitch Ratings pointed out in a non-rating action commentary.
“This means aggregate digital bank balance sheets will be less than 1% of the system in the medium-term under even the most bullish assumptions.”
Recall that Bank Negara Malaysia (BNM) has announced the five licence winners last Friday (April 29).
Three conventional digital banking licenses were awarded to a consortium of Boost Holdings Sdn Bhd and RHB Bank Bhd; a consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; and a consortium led by SEA Ltd (parent company of Shopee and YTL Digital Capital Sdn Bhd).
Winners of the two Islamic digital banking licenses are AEON Financial Service/AEON Credit Service/Money Lion and the KAF Investment Bank consortium.
Economies of scale
Moreover, there are other structural market hurdles for digital banks to overcome before they are likely to become profitable.
The first is attaining scale. The central bank states that 8% of the Malaysian population is unbanked and the vast majority of these people have little or no income which suggests they are not likely to become bankable simply because of renewed competition or better digital services.
“Competitive pricing is also a barrier. Malaysia is a well-regulated jurisdiction with supervisory guidelines and prevailing practices that espouse responsible financing,” opined the international rating agency.
“The availability of unsecured financing at comparably low rates of 15%-18% is likely to set low benchmarks on what new entrants can realistically charge which may not be adequate to compensate for the higher risk of lending to lower credit-quality customers.”
Lastly, Fitch Ratings said major local banks have formidable market share, hence are capable of quickly responding to and competing with digital banks.
“The large banks’ incumbency advantage is unlikely to be eroded within the medium term, even if competition intensifies at the margin in areas that the digital banks choose to compete in,” it noted.
Although digital banks are being set up amid an economic recovery that gives the new banks a decent prospect at growing their balance sheets in the initial years, Fitch Ratings expects economies of scale to be elusive amid the size cap and with competition likely to be acute.
“Near-term asset-quality risks are high as the banking sector is emerging from a period of extensive debt relief,” projected the international rating agency. Digital banks that adopt loose underwriting standards to grow market share may encounter distressed borrowers clutching at the nearest lifeline, leading to adverse credit selection.
“The path to financial viability for digital banks remains open but we believe it will be a long and trying ascent,” added Fitch Ratings. – May 4, 2022
