Key takeaways from digital banking ESS
? In 2023, we think new digital banks will aim to capture shares in an untapped
value pool (revenue) of RM10bn, out of the sector’s RM91bn (EY estimate).
? In our view, new digital banks will take 3-5 years to break even; hence, we do
not expect them to start a long-lasting price war within this period.
? The emergence of new digital banks does not alter our positive outlook for
the sector; reiterate Overweight on banks.
Expert speaker session with EY on digital banks
We hosted an expert speaker session (ESS), featuring Mr. Ling Kay Yeow, a partner of
Ernst & Young Consulting (EY), as the speaker, to address likely implications following the
recent award of five digital banking licences by Bank Negara Malaysia (BNM) to the: 1)
Boost-RHB Bank consortium, 2) GXS Bank-Kuok Brothers consortium, 3) Sea Limited-YTL
consortium, 4) AEON consortium, and 5) KAF Investment Bank consortium. EY said that
the incumbent banks have three options in their strategies to respond to the emergence of
new digital banks: 1) build on their existing digital infrastructure, 2) create new digital
channels, and 3) create digital-only banks with the existing licence. We think that option 3
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).
Digital banks could focus on a RM10bn untapped value pool in 2023
EY estimated a total value pool (akin to revenue) of c.RM91bn for banks (retail and SME
customers) in 2023F. Within this, we think the digital banks could aim to take a share in the
segments amounting to a total value pool of c.RM10bn, comprising c.RM3bn of new SME
loan customers and c.RM7bn for underbanked and unbanked retail customers.
New digital banks could take 3-5 years to break even
We concur with EY’s view that the new digital banks could take 3-5 years to break even as
they need time to build up scale. With our expectation that these banks will commence
operations by 2023-24F, they would only break even between 2026 and 2029. 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.
Reiterate Overweight on banks
Following the ESS, we stick to our view that the emergence of new digital banks will not
materially alter the competitive landscape of the banking industry in the next 3-4 years,
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 RM3bn cap on asset
size per digital bank within 3-5 years after incorporation. As such, we are unwavering in
our Overweight call on banks, predicated on the potential re-rating catalyst of continuous
earnings recovery in 2022-23F. Our picks for the sector are Hong Leong Bank, RHB Bank
and Public Bank.