This article first appeared in The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023

AXIATA Group Bhd expects its digital banking venture to be profitable in 2027 after three years of operation, without fresh capital injection from the regional telecommunications group, as it prioritises shareholders’ returns over the coming years.

According to group CEO and managing director Vivek Sood, losses or expenditure requirement in the initial years will be funded partially by new investors in Axiata’s fintech outfit Boost Holdings Sdn Bhd, which owns Boost Bhd — the 60:40 digital bank joint venture with RHB Bank Bhd that is awaiting Bank Negara Malaysia’s approval.

“For the next five years, we probably would need around RM300 million to RM400 million [in funding] because all the lending business, essentially, will come out of the deposits,” he says, adding that the digital bank will start offering CASA (current account savings account) to customers once it is launched at the end of the year.

“[By] 2027, we should become profitable, but effectively the funding for those losses [in the initial years] will only come from Boost Holdings, with new investors coming in. By that time (2027), we will look at going into the market, IPO (initial public offering) or monetisation of the assets,” he continues.

Boost is 78%-owned by Axiata Digital Services Sdn Bhd (ADS), with the remaining equity interest held by Great Eastern Digital Pvt Ltd.

Axiata, meanwhile, owns a 96.6% stake in ADS, with the balance held by Mitsui & Co Ltd.

“We don’t think we will have new investors coming into the bank. The bank is a partnership between us and RHB, so that will remain,” says Vivek.

“But we will have new partners and investors coming into Boost Holdings, which is the holding company for the bank. [For example,] we have Great Eastern there as our partner. Then, we might get others who are strategic to [join] the fintech business as our partners, and that is what we will use as a source of funding for the bank,” he explains.

While Boost Holdings is still loss-making, filings with the Companies Commission of Malaysia (SSM) show that the fintech company’s loss after tax had nearly halved to RM162.57 million for the financial year ended Dec 31, 2021 (FY2021), from RM302.75 million in FY2020.

Revenue grew 73% to RM83.31 million in FY2021 from RM48.25 million in FY2020.

Boost-RHB are among the five consortiums — three conventional and two Islamic — that have secured digital banking licences from Bank Negara, out of 29 applications in April last year. These digital bank licence holders will undergo a 12- to 24-month operational readiness process that will be validated by Bank Negara through an audit before they can commence operations.

Once a licensed digital bank commences operations, it must maintain at all times a minimum amount of capital funds of RM100 million unimpaired by losses, while its total assets must not exceed RM3 billion during the first three to five years of the foundational phase.

Vivek says once the digital bank is established, Boost users will be given the option to migrate to the banking unit. “For [users], nothing changes. Instead of keeping [your money] in the wallet, you can keep it in the [digital] bank. We will follow the KYC (know-your-customer) standards laid out by the central bank. We convert them into the bank’s customers, move them there and they can earn some [interest].”

Boost currently has about 10.5 million registered users, of which about 700,000 are active users. Assuming each of these customers leaves RM40 to RM50 idle in his or her e-wallet or digital bank account, it would amount to RM30 million to RM40 million.

“We will still remain in payment. Payment is important to acquire new customers and merchants. In Boost wallet, we have around 10.5 million customers, around half a million merchants, and we have already started lending. It has lent around RM2.5 billion-plus as credit to MSMEs (micro, small and medium enterprises),” says Vivek.

“So, [the e-wallet] becomes a channel for the digital bank. Similarly, the lending of RM2.5 billion, that whole [loan] book, will move to the digital bank. So, the digital bank will then start lending, but we will still use the digital wallet as a customer interface,” he explains.

Boost is the third-largest e-wallet player in Malaysia in terms of registered users, after TNG Digital Sdn Bhd and Grab Holdings Ltd.

Last year, TNG Digital registered a 10.7% increase in registered users to 18.6 million from 16.8 million in 2021, and increased its number of merchants to 727,000 from 557,000 as at end-2021.

CIMB Group, which owns 45% of TNG Digital, disclosed that annual transacting users grew 23% to 9.2 million last year, from 7.5 million in 2021.

While Grab did not disclose the breakdown of its geographical user numbers, it registered 32.7 million of total monthly transacting users last year, up from 28.1 million in 2021 and 27.7 million in 2020.

The US-listed firm reported revenue of US$1.43 billion in 2022, with over one-third or 35.5% coming from Malaysia, being the largest contributor. It was followed by Singapore (21.1%), Indonesia (19.2%), the Philippines (8.7%) and Thailand (7.6%), while the rest of Southeast Asia contributed 7.9%.

Although digital businesses may seem small in the context of Axiata group’s market capitalisation of RM24.3 billion, Vivek says the individual valuation is significant.

“It looks small, but we have recently done a round of valuation. ADA (Axiata Digital & Analytics Sdn Bhd) for example, [its valuation] is around US$500 million to US$600 million. Similarly, with the digital bank coming in, Boost is I think around US$400 million to US$450 million,” he adds.

Combined, Axiata’s equity value in these digital businesses would be worth some US$700 million, or about RM3.27 billion, says Vivek.

ADA, a digital marketing services provider, is 63.5%-owned by ADS while Softbank Corp holds a 23% stake and Sumitomo Corp, the remaining 13.5%.

Unlike Boost, ADA is already profitable. SSM data shows that its profit after tax jumped nearly 10 times to RM53.73 million for FY2021, from RM5.52 million in FY2020, while revenue nearly doubled to RM889.70 million from RM459.72 million. 

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