Digital Banking Licence Awardees
BNM has awarded five digital banking licences. We reckon that this could give rise to
a short-term share price uptrend for the awardees especially, the smaller listed
companies. However, for potential equity value accretion of the stocks under our
coverage, RHB Bank and Axiata are only expected to see 0.8% and 1.5% of their
respective market caps. Maintain BUY on RHB Bank and HOLD on Axiata.
WHAT’S NEW
• Digital banking awardees. Bank Negara Malaysia (BNM) has awarded the digital banking licences to the following consortiums: a) Boost Holdings-RHB Bank, b) Grab Singtel-Kuok Brothers, c) Sea-YTL Digital Capital, d) Aeon Financial Services Co-AEON Credit, and d) consortium led by KAF Investment Bank.
• Marginal near-term value accretion. As shown in the table on RHS, we estimate a marginal potential equity value accretion of between 0.80-1.30% and 1.5% to RHB Bank’s and Axiata’s current market capitalisations respectively, based on their respective stakes in the consortium. This assumes an ascribed price to sales multiple of 3.0x-5.0x, in line with regional peers. In terms of revenue assumption metrics, we assumed that the digital banks will derive 80% of their income from net interest income with an estimated NIM of 5%, which is slightly over 2x that of conventional banks in Malaysia coupled with a total asset cap of RM3.0b and loans to deposit ratio of 75%.
• No major threats to conventional banks. We believe the five digital bank licence winners are unlikely to pose a major threat and will be able to co-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 to begin with are not the key focus of the traditional banks. Secondly, the assets of the five combined digital banking licensees (RM15b) may shave away only <1% share of system loans, which is insignificant; we estimate every 1% slowdown in loans growth could reduce sector earnings by 0.3%. Thirdly, conventional banks have already equipped themselves digitally by embarking in digital transformation projects. Considering traditional banks’ bigger balance sheet, they have more budget capacity on an absolute monetary basis to spend and innovate vs digital banks.
ACTION
• Short-term share price boost could be short-lived. We reckon that there could be a shortterm share price uptrend of the awardees in view of the potential additional income sources
for the companies. Having said that, we do not expect an immediate earnings impact to the
companies given an expected 2-3 years gestation period for the digital banks to turn
profitable. Given the marginal near- to medium-term value accretion coupled with an
expected 2-3 years gestation period (average period for digital banks in South Korea and
China to be profitable was 2-3 years), we think that any near-term spike in share prices could
be short-lived.
• RHB Bank: Maintain BUY and target price of RM6.90 (10.1% ROE FY22/23, 0.90x
2022/23F P/B). We estimate that RHB’s 40% stake in the Axiata-RHB digital banking
consortium translates to only a maximum asset accretion of RM1.2b or 0.35% of its total
group asset. This translates to a potential revenue enhancement of only 0.7% and equity
value enhancement of 0.8-1.3% assuming a price/sales valuation peg of 3.0x-5.0x. We
continue to like RHBBANK for its: a) highest CET of 16.8%, which could provide scope for
upside surprise in dividends, b) attractive valuations, and c) above industry loans growth.
• Axiata: Maintain HOLD and target price of RM4.00. Our back-of-the-envelope calculations
suggest that winning the DBL can potentially add RM500m to market cap (or 1.5%) based
on 5x price/sales of Axiata’s 60% stake in the Axiata-RHB consortium. Boost wallet will
remain the distribution platform and investments will be required for development of backend infrastructure. Maintain HOLD with a target price of RM4.00. The stock offers a 2.6% to
5.0% dividend yield for 2022-24.
ESSENTIALS
• Business model should focus on serving underserved market. The combined assets of
the five digital banks will be capped at RM15b (RM3b each) for the first 3-5 years of
commencement of operations (known as the foundation phase), and applicants must
maintain a minimum total capital ratio of 8% and minimum paid-up capital of RM100m, and
they will also be subjected to the same level of stringent requirements of full-fledged banks
after the foundation phase.
• What happens after the foundation phase? A licensed digital bank may after three years
from the commencement of its operations submit an application to the Bank for the
foundational phase to end and for the business limitation to be uplifted. The digital bank
would also need to achieve a minimum amount of capital funds of RM300m unimpaired by
losses and shown satisfactory progress in achieving the committed value propositions as
described in its business plan. By the end of the fifth year from the commencement of its
operations, a licensed digital bank shall comply with all regulatory requirements applicable to
an existing licensed bank or licensed Islamic bank.
• BNM has the right to revoke the digital banking licences. A licensed digital bank that
fails to fulfil the requirements of: a) achieving a minimum amount of capital funds of
RM300m unimpaired by losses, and b) shown satisfactory progress in achieving the
committed value propositions as described in its business plan by the end of the fifth year
from the commencement of its operation shall implement its exit plan. BNM can take
enforcement actions against the digital bank including the revocation of the digital bank’s
licence. Even after the end of the foundation phase, the licensed digital bank shall still serve
the underserved or unserved segments as part of its business operations.