Digital banks to thrive peacefully alongside traditional banks - HLIB

KUALA LUMPUR - Hong Leong Investment Bank Bhd (HLIB) maintained an ‘overweight’ call on the banking sector as it expects digital banks to thrive peacefully with their traditional counterparts and not become major threats in the near future.

In its research note today, HLIB said classical banks were also not taking digital banks lightly and had been embarking on more digital transformation projects to shift away from outdated business paradigms.

"Thus, we find the sector’s risk-reward profile remains skewed to the upside. In our opinion, it is not easy to dethrone traditional banks as main financial institutions given their good head start over newer, digital-only rivals.

"In addition, the former has more budget headroom on an absolute monetary basis to spend and innovate versus the latter,” the research house shared.

On April 29, 2022, Bank Negara Malaysia (BNM) announced that the five digital banking licence winners were consortiums led by Boost Holdings Sdn Bhd and RHB Bank Bhd; GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; Sea Limited and YTL Digital Capital Sdn Bhd; Aeon Financial Service Co Ltd, Aeon Credit Service (M) Bhd and MoneyLion Inc; and a consortium led by KAF Investment Bank Sdn Bhd.

HLIB said the digital banks are still undergoing a period of operational readiness, but a few of them foresee business commencement by the end of the year.

It said that the banks should begin their rollout by April 2024 at the latest since BNM shared that this process takes between 12 to 24 months from the award date, inclusive of regulatory validation and audit work.

"While we recognised the potential benefits of delivering good client experience to gain a competitive edge, it is important to note banking is still a highly commoditised business, with pricing being a critical pull factor.

"From our findings, digital banks over there offered high deposit rates but, lending-wise, were comparable to incumbents,” it said.

The quintet, HLIB believed, would challenge each other in terms of better service levels and offer competitive interest rates.

It opined that in the beginning, 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.

"Also, bitesize loans and deposits are expected since there is an asset threshold.

"Moreover, looking at the trends in China and South Korea, we believe that the five digital banking licence winners are not major threats, and they can co-exist quite harmoniously with their classical counterparts.

"Lastly, the combined assets of the five victors, which were about RM15 billion, make up only less than one per cent share of system loans, which is insignificant and non-disruptive,” it added. - BERNAMA