Banking - Draft Framework for virtual banks

HLInvest

Publish date: Mon, 30 Dec 2019, 09:02 AM

Draft framework for virtual banks

As expected, the proposed digital banking framework by BNM is sector friendly - the goal is to enable innovative technology application in the financial sector and fill market gaps in the underserved segments. We do not see them as major threats as archaic banks are already active in embarking digital transformation projects. Also, assets of the 5 combined digital banking licensees (RM10b) may potentially shave away only <1% share of system loans, which is insignificant. All in all, the growth outlook for banks is still modest but we are consoled by cheap valuations. Maintain NEUTRAL and we advocate selective stock picking. Our preferred pick is Maybank (TP: RM9.05). Other BUYs are RHB (TP: RM6.20), BIMB (TP: RM4.80) and Alliance (TP: RM3.15).

NEWSBREAK

Bank Negara Malaysia (BNM) issued the Exposure Draft on Licensing Framework for Digital Banks. We gathered up to 5 digital banking licences may be issued to qualified applicants. The objective is to offer banking products and services to address market gaps in the underserved and unserved segments.

Interested parties are required to submit a 5-year business plan and demonstrate their projected path to profitability. Also, there will be an asset threshold of <RM2b in the initial 3 to 5 years of operations; this is to safeguard financial system stability and act as a ‘foundational phase’ for licensees to exhibit their viability and sound operations. Besides, they are obliged to maintain RM100m of minimum capital funds (unimpaired by losses) during the ‘foundational phase’, and RM300m thereafter; a minimum total capital ratio of 8% must be achieved as well.

For existing banks, they can continue to digitalize their business operations by using current licenses and do not need to apply for a separate new one to do so. BNM aims to finalize the policy document by 1H2020.

HLIB’s VIEW
Not major threats. As expected, the proposed digital banking framework by BNM is sector friendly - the goal is to enable innovative technology application in the financial sector (where traditional banks are already active in embarking digital transformation projects to shift away from outdated business paradigms) and fill market gaps in the underserved segments. Hence, we think digital banks are not major threats and they can co-exist quite harmoniously with their conventional counterparts (see our 30-Oct- 19 report, titled ‘Deep diving into digital’). Also, with an asset threshold of <RM2b, collectively, the 5 combined digital banking licensees (RM10b) may potentially shave away only <1% share of system loans; we estimate that every 1% slowdown in loans growth could reduce sector earnings by 0.5%.

Forecast. Unchanged.
Maintain NEUTRAL. The modest growth outlook coupled with rising asset quality and interest rate risks prevented us to be more bullish on banks - this is despite attractive valuations, trading near -2SD to both its 5-year and 10-year mean P/B. However, for long-term investors who favour sector exposure, we advise to adopt a selective stock picking strategy. Our preferred pick is Maybank (TP: RM9.05) given its above-average dividend yield of 6-7% and low foreign shareholding (19%) vs larger domestic peers (30-35%). Other BUYs are RHB (TP: RM6.20) and BIMB (RM4.80), where both are still eking out robust growth of 3.9% and 7.3% respectively vs sector’s 3.5%, while Alliance (TP: RM3.15) saw its valuations got bashed to below -2SD and trough level.

Source: Hong Leong Investment Bank Research - 30 Dec 2019