Wednesday 24 Apr 2024
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KUALA LUMPUR (May 18): CGS-CIMB Research expects digital banks to commence operations by 2023 to 2024 and only break even between 2026 and 2029. 

In a Wednesday (May 18) report, it noted that it thinks 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. 

The local research house shared that it recently hosted an expert speaker session (ESS), featuring a partner of Ernst & Young Consulting (EY) to address likely implications following the recent award of five digital banking licences by Bank Negara Malaysia (BNM) to the Boost-RHB Bank consortium, GXS Bank-Kuok Brothers consortium, Sea Ltd-YTL consortium, AEON consortium, and KAF Investment Bank consortium. 

It added that EY said the incumbent banks have three options in their strategies to respond to the emergence of new digital banks: build on their existing digital infrastructure, create new digital channels, and create digital-only banks with the existing licence. 

CGS-CIMB thinks 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). 

It added that digital banks could focus on a RM10 billion untapped value pool in 2023.

“EY estimated a total value pool (akin to revenue) of circa RM91 billion 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 circa RM10 billion, comprising circa RM3 billion of new SME loan customers and circa RM7 billion for underbanked and unbanked retail customers,” noted the report. 

“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 three to four 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 RM3 billion cap on asset size per digital bank within three to five 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,” added CGS-CIMB.

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