PETALING JAYA: The requirement that digital banks are not allowed to establish any physical branch under the Licensing Framework for Digital Banks might disincentivise existing traditional banks to acquire the digital bank licence, according to MIDF Research.
The research house said this would mean that existing banks will have to create a digital bank subsidiary and with that, it could tie the banks with additional capital.
“Besides, existing banks’ licences already allowed it to offer its products digitally. However, we understand that CIMB, Affin, Hong Leong Bank, AMMB and Standard Chartered have expressed interest. Of these, CIMB is the only one with experience after it had set up a digital-only bank in Philippines and Vietnam,“ said MIDF in a report today.
A licensed digital bank is required to establish a registered office in Malaysia but this is to facilitate communication with Bank Negara Malaysia or face-to-face customer complaints.
“We understand that some countries allows for digital banks to have one branch. However, we speculate that this is to push the digital banks to offer its products through digital innovation.”
Interestingly, it said a limit is also placed on total asset size and not on type of customers.
“We had expected the limit will be applied on the type of customers such as retail and SMEs only. Also, we had expected there would be restriction on a per customer basis. Nevertheless, we believe that the RM2 billion total asset is an implicit limit. We opine that this will steer the digital banks towards more micro lending offerings.”
With five licences going to be issued, it believes the most likely candidate for applying for the licence will be the prominent ones such as Boost, Grab, Touch ‘N’ Go and BigPay.
“Overall, we believe that it is still early days for digital banks to be a threat to existing banks in the short to medium term. We believe that it is most likely that the digital bank licences will be issued by end 2020 and operational by 2021.”
In addition, it said the type of banking products have been implicitly limited during the foundational years and banks are already investing heavily to enhance its digital offerings.
“Therefore, we maintain positive on banks at current juncture with Maybank, CIMB and RHB as its top picks.”
Meanwhile, HLIB Research thinks digital banks are not major threats and that they can co-exist harmoniously with their conventional counterparts.
Also, with an asset threshold of less than RM2 billion, collectively, it said the five combined digital banking licensees (RM10 billion) may potentially shave away only less than 1% share of system loans.
“We estimate that every 1% slowdown in loans growth could reduce sector earnings by 0.5%,“ said HLIB.
Maintaining a neutral call on the sector, it said the modest growth outlook coupled with rising asset quality and interest rate risks prevented HLIB to be more bullish on banks, despite attractive valuations.
“However, for long-term investors who favour sector exposure, we advise to adopt a selective stock-picking strategy. Our preferred pick is Maybank given its above-average dividend yield of 6-7% and low foreign shareholding (19%) versus larger domestic peers (30-35%).”
