Inaugural Digital Banking Licensees

Bank Negara Malaysia (BNM) has named the five (5) winners (from the 29 applications) of the country’s inaugural digital banking licenses. Three (3) consortiums will be licensed under the Financial Services Act 2013 (FSA) while two (2) will be licensed under the Islamic Financial Services Act 2013 (IFSA). The successful applicants are:

• consortium of Boost Holdings Sdn Bhd (Axiata Group) and RHB Bank (FSA)

• consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd (FSA)

• consortium led by Sea Limited and YTL Digital Capital Sdn Bhd (FSA)

• consortium of AEON Financial Service Co. Ltd., AEON Credit Service (M) Berhad and MoneyLion Inc. (IFSA)

• consortium led by KAF Investment Bank Sdn Bhd (IFSA)

To recap, these digital banks will need to have minimum capital funds of RM100m during the foundational phase and RM300m at the end of the foundational phase, and will operate with an asset limit for a minimum of three (3) years up to a maximum of five (5) years during its foundational phase. Total assets shall not exceed RM3bn. Minimum total capital ratio is 8%, amongst various other regulatory requirements.

The licensees are allowed to hold digital assets subject to the relevant regulatory requirements, carry out certain capital market activities, accept foreign currency deposits, and become a member of e-SPICK or appoint an existing licensed bank that is an e-SPICK member. The licensees are not allowed to carry on any business or activity that is not the purpose or in connection with its licensed digital banking business unless otherwise approved by BNM however. A licensee is general bound by the same requirements as licensed banks and may offer products outside of Malaysia, subject to the other country’s rules and regulations. Licensees are prohibited from offering banking products sold by financial institutions outside of Malaysia however.

The Malaysian banking industry is at the dawn of a new era, with the awarding of these inaugural digital banking licenses. 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 digitalization and/or digitization initiatives on their own in-step with the evolving landscape. 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 normalization 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. While we maintain our NEUTRAL view on the sector, it continues to be with a positive bias given its lagging valuations relative to the broader market. For sector exposure, we like Maybank and CIMB Group.

Source: PublicInvest Research - 5 May 2022