HLBank Research Highlights

Banking - Here Comes the Digital Banks

Publish date: Thu, 05 May 2022, 09:24 AM
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This blog publishes research reports from Hong Leong Investment Bank

Digital banking license winners have bright prospects and beneficiaries under our coverage are Axiata (HOLD, TP: RM4.03), RHB (BUY, TP: RM7.00), and YTL Power (BUY, TP: RM1.05). That said, we believe they are not major threats and can co-exist quite harmoniously with their conventional counterparts. Thus, we continue to opine that the sector’s risk-reward profile is still skewed to the up side as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. Stay OVERWEIGHT; BUY calls include: Maybank, Public, RHB, BIMB, Affin.


Last Friday, Bank Negara Malaysia (BNM) has announced the 5 successful applicants for the digital banking licenses: (i) consortium of Boost Holdings and RHB Bank, (ii) consortium of GXS Bank and Kuok Brothers, (iii) consortium of SEA Limited and YTL Digital Capital, (iv) consortium of Aeon Financial, Aeon Credit Service, and MoneyLion Inc, (v) consortium of KAF Investment Bank. We gathered they will have to undergo a period of operational readiness that will be validated by BNM through an audit before they can commence operations. This process may take between 12-24 months.


Wins for Axiata, RHB, YTL Power. We are not entirely surprised with the outcome of the digital banking license winners as they have strong heritage in the financial, telco and tech space, which are ingredients of success seen in neighbouring countries. For companies under our coverage, beneficiaries are Axiata (HOLD, TP: RM4.03), RHB (BUY, TP: RM7.00), and YTL Power (BUY, TP: RM1.05). While prospects are bright, we resist the temptation to model in digital banking contribution and valuation for the trio, before finding out more about their business plans and strategies.

Trends in China and Korea. We noticed digital banks in China and Korea took c.1-2 years from inception to turn profitable. Even after 4-6 years of operations, both loans and deposits growth remained phenomenal at 30-50% annually. That said, Chinese and Korean digital banks are still only fetching <3% market share in their respective domestic system loans and deposits. As for net interest margin (NIM) experience, the gap between Chinese digital vs traditional banks is <2ppt (where the former is higher) while in Korea, similar NIM profile was observed between the two; this goes to show product pricing is competitive and it is not easy to dethrone traditional banks as main financial institutions. Putting aside impact of any monetary policy actions, we find that loans and deposits growth trajectory of traditional Chinese and Korean banks stayed robust (China: +7-12% YoY; Korea: +8-10% YoY) while their NIMs held steady (see Figure 3 and 4).

Not major threats. Looking at the trends in China and Korea, we believe that the 5 digital banking license winners here are not major threats and they can co-exist quite harmoniously with their conventional counterparts. Firstly, their primary existence is to address market gaps in the underserved and unserved segments, which to begin with are not playground for classical banks. Secondly, the assets of the 5 combined digital banking licensees (RM15b) could potentially shave away only <1% share of system loans, which is insignificant; we estimate every 1% slowdown in loans growth could reduce sector earnings by 0.5%. Thirdly, conventional banks have already equipped themselves ahead of time by embarking in digital transformation projects to shift away from outdated business paradigms. Given archaic banks’ bigger balance sheet, they have more budget headroom on an absolute monetary basis to spend and innovate vs digital banks.

Forecast. Unchanged.

Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. As such, we remain bullish and employ a rather broad stock buying strategy in 1H22. For large -sized banks, we like Maybank (TP: RM9.40) for its strong dividend yield and Public Bank (TP: RM4.80) for its large potential headroom to perform management provision overlay writebacks. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. As for small-sized banks, BIMB (TP: RM3.45) and Affin (TP: RM2.35) are preferred; we like the former for its positive structural growth drivers and better asset quality while the latter has special dividends potential and strong financial metrics.


Source: Hong Leong Investment Bank Research - 5 May 2022

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