KUALA LUMPUR (July 14): Hong Leong Investment Bank (HLIB) Research expects digital banks to thrive alongside physical banks due to offerings of bite-sized loans and deposits.
In a sector update on Friday (July 14), HLIB said that since there is an asset threshold of less than RM3 billion, digital banks can target a broader audience, despite creating little value for their listed owners.
HLIB maintained its "overweight" rating for the banking sector, with "buy" calls on Public Bank Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd and Bank Islam Malaysia Bhd.
Public Bank has been given a target price (TP) of RM4.80, followed by Alliance Bank (TP: RM4.15), CIMB (RM5.85), RHB (RM6.60), AMMB (RM4.35) and Bank Islam (RM2.35).
Analyst Chan Jit Hoong said that from a fundamental lens, valuations are attractive, with trading close to -1 standard deviation price-to-book (P/B) ratio and an appealing yield of 5% to 6%.
“Also, we noticed a divergence between P/B and return on equity trajectories, where both instead should be moving in unison.
“Hence, we continue to be tactically bullish on the sector, and employ a rather broad stock-buying strategy.”
Chan has examined the five digital banks, including Boost-RHB, GXS-Kuok, SEA-YTL, AFCS and KCMJ, which are expected to be launched by year end, by comparing them to Singapore’s digital banks.
“While we recognise the potential benefits of delivering good client experience to gain a competitive edge, it is important to note that banking is still a highly commoditised business, with pricing being a critical pull factor.
“From our findings, digital banks [in Singapore] offered high deposit rates but lending-wise were comparable to incumbents.”
Boost-RHB consists of 60% ownership by Boost and 40% by RHB. GXS-Kuok involves 44.55% by Kuok Brothers Sdn Bhd and 55.45% by GXS, in which GXS is a 60-40 joint venture between Grab and Singtel.
SEA, meanwhile, holds 60% of SEA-YTL, with YTL holding the remainder. AFCS is held 50-50 between AEON Financial and AEON Credit.
Chan said KCMJ’s ownership information was not available at the time of writing.
He said that the five digital banks will challenge each other in terms of better service levels, while offering competitive interest rates.
“In the beginning, we foresee some of the digital banks could offer their products and services on an invite-only basis, before gradually opening them up to the mass public.”
In terms of loans, he noted that there should be little to no collateral, fees and charges involved, while deposit rates will be attractive and calculated daily, but with a capped amount.
Despite this, Chan added that it would take roughly three to four and a half years for the digital banks to be in the black, according to Boost-RHB, GXS-Kuok, and AFCS.
“We opted to use 10 times price-to-revenue multiple to value the digital banks. Under our base-case scenario, we arrived at a mid-range fair value of RM660 million with an implied price-earnings (P/E) ratio of 30 times, RM1.26 billion in our bull case (24 times P/E), and RM510 million in our bear case (48 times P/E).”
Overall, he said that the digital banks would create little value for Axiata Group Bhd, with a "hold" call and a TP of RM2.83, along with RHB ("buy"; TP: RM6.60) and YTL Power International Bhd ("buy"; RM2.05).
“The fair values, derived under our base, bull, and bear cases, make up only a minor 1% to 5% of the trio’s current share prices,” said Chan.
Chan also said that banks under HLIB's coverage had improved their front-end digital applications over the past years, as well as having more budget headroom on a monetary basis to spend and innovate compared to digital banks.
“Moreover, looking at the trends in China and South Korea, we believe the five digital banking licence winners are not major threats, and can co-exist harmoniously with their classical peers.
“Lastly, the combined assets of the five victors [is less than] 1% share of system loans."
At the time of writing on Friday, Public Bank shares had gone up by 1.02% or four sen to RM3.96 each, valuing the bank at RM76.87 billion.
Alliance Bank shares also went up by 0.30% or one sen to RM3.39. Its market capitalisation stood at RM5.25 billion.
Meanwhile, CIMB’s counter rose to one sen or 1.92% to RM5.30, giving it a market cap of RM56.31 billion.
RHB Bank’s share price was six sen or 1.09% higher at RM5.54. Its market value stood at RM23.75 billion.
For AMMB, its share price rose by four sen or 1.10% to RM3.68, with a market cap of RM12.16 billion.
Bank Islam increased one sen or 0.48% to RM2.10, valuing it at RM4.80 billion.