• OVERWEIGHT, Top Picks: Hong Leong Bank, Malayan Banking (Maybank), and AMMB. The long-awaited digital bank license has been awarded to five successful bidders out of the 29 applicants. The immediate-term focus is likely to be on the micro and SME community, as well as on unsecured lending and selected offerings of wealth management products. We do not anticipate an immediate impact upon the award of the digital banking licences, as successful applicants will undergo a period of operational readiness which may take 12-24 months to complete.

• Five successful bidders. Three digital bank licenses issued under the Financial Services Act 2013 (FSA) have been awarded to the: i) Boost Holdings and RHB Bank consortium; ii) GXS Bank and Kuok Brothers consortium, and iii) Sea Group and YTL Digital Capital consortium. The remaining two consortiums – the AEON Financial Service-AEON Credit Service (M)-MoneyLion and KAF Investment Bank consortiums – were awarded licences under the Islamic Financial Services Act 2013 (IFSA).

• Core focus on micro and SME lending. Given Bank Negara Malaysia’s (BNM) stated purpose for digital banks – to address the underserved market segments – we think new entrants in the immediate term will likely focus on the micro and SME community, as well as unsecured lending and selected offerings of wealth management products.

• Potential impact of new digital banks. While this would not be immediately disruptive for incumbent banks, digital banks with partners that have good ecosystems can grow to become a threat. We believe incumbent banks that have taken steps to digitalise their operations will be better positioned to fend off potential competition from these new digital banks. That said, we do not view such awards as disruptive for the conventional banks, despite expectations of continued erosion on the payment side of the business – which is not unexpected, as the handling of those transactions is not all that profitable.

• No changes to our OVERWEIGHT sector weighting. Our investment thesis remains unchanged – we believe the reopening of the economy and improving asset quality themes will remain in play. We continue to advocate defensive names to weather market volatility, following the pecking order for our preferred Top Picks: Hong Leong Bank>Maybank>AMMB.

• Key sector risks are escalations in geopolitical tensions and the knock- on effects on global growth. Surprise provisions could bring downside risks to sector earnings, but we think lumpy provisions ahead should be fairly limited, as banks have taken quite a fair bit of provisions over the past two years.

Source: RHB Research - 5 May 2022