KUALA LUMPUR, May 5 — Research houses are positive on the banking sector following Bank Negara Malaysia's (BNM) announcement of the five successful applicants of the digital bank licences as they are not expected to impact its strong growth.

On April 29, BNM unveiled the five winners of the new digital banking licences in Malaysia, namely Boost-RHB Bank consortium, GXS Bank-Kuok Brothers consortium, Sea Ltd-YTL consortium, AEON consortium, and KAF Investment Bank consortium.

In a note today, MIDF Research said the applicants for the licences will be subject to a foundational phase of three to five years, which includes an asset size cap of RM3 billion.

“The asset size cap is expected to stunt growth, preventing digital banks from posing any serious competitions to banking industry players,” it viewed. 

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CGS-CIMB Research reiterates overweight stance on banks as it expects the issuance of new digital banking licences to materially alter the competitive landscape of the banking sector over the next three to four years.

It said this was premised on the reasons that the new digital banks are only allowed to provide products/services to unserved/underserved segments, which are not the target markets for incumbent banks.

“Besides that the asset size of the new digital banks is limited to a maximum of RM3 billion per bank within three to five years after the inception, while incumbent banks have established business franchise and digital banking systems to compete with the newcomers,” it shared.

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CGS-CIMB noted that RHB Bank Bhd is the only Malaysian bank that secured a new digital banking licence through its joint venture with Boost.

It viewed that this would be negative for RHB Bank in the short term due to the potential operating losses over the next two to three years from its new digital bank but it expects the venture to be positive for the bank in the longer term when its digital bank turns profitable.

 Furthermore, RHB Bank can learn the ropes of running a pure digital bank, which could help improve its existing operations, it said.

In another note, Public Investment Bank Bhd PIVB said the Malaysian banking industry is at the dawn of a new era, with the awarding of these inaugural digital banking licences and maintains a ‘neutral’ view on the sector.

“We reckon it will be a while before they are able to challenge the incumbency of the traditional banks. However, many of the latter also having already embarked on prior digitalisation and/or digitisation initiatives on their own in-step with the evolving landscape,” it noted.

It said digital banks’ primary focus on the un-served and under-served segments may come at the expense of profitability, though it must be noted that they are also likely have greater cost advantages.

“Short-term volatilities notwithstanding, expected rate normalisation this year and economic recovery will bring about asset quality improvements, loans growth and margin expansions, all of these medium-term boons to the sector,” it said.

Meanwhile, Kenanga Research maintains an “overweight” call on the banking sector but welcome the inclusion of digital banks into the financial sector as it would likely stir the operating landscape of traditional banks in the long term.

The research house said the issuance of the licence is a necessary step in developing the national maturity in accepting new evolutions and improvements in collusion with global standards.

“That said, we do not believe they would undermine the investment sentiment of the existing banks as the digital banks would first need to launch into the market.

“According to the licensee conditions, the consortiums have up to 24 months to commence operations of the proposed digital banking units. Additionally, their eventual scale of operations would still fall shy in comparison to conventional banks,” it said.

Further on the banking sector, Kenanga believes the ongoing macro factors will present more tailwinds than headwinds for the banking sector.

It shared that Malaysia appeared to be mostly unaffected by the Russia-Ukraine conflict as neither countries are a meaningful trade partner, albeit weighing down global investor sentiment.

“Unless we experience another unprecedented worsening of the Covid-19 situation, we anticipate the ensuing economic recovery would fuel loans growth, as well as uplift asset quality as income streams become more sustainable.

“Write-backs from pre-emptive impairment provisions and management economic overlays could be an eventuality but in the meantime, banks are likely to see calender year 2022 earnings smacked down by the one-off prosperity tax,” it added. — Bernama