We maintain our OUTPERFORM call and GGM-derived PBV TP of RM8.55 for AEONCR and keeping our forecast. Insights from Aeon Bank reflect challenges faced by the industry with collaboration between license holders and regulators being key to ensure longterm agendas are met. That said, we maintain our 3-star ESG rating on AEONCR (with no ESG-premium to valuations), subject to further assessment on Aeon Bank and the industry’s mediumterm ability to cater to the unserved/underserved communities.

We met with Aeon Bank (50%-owned by AEONCR) to obtain updates on its progress and challenges faced in meeting Bank Negara’s objectives for digital banks. Key takeaways from our meeting are as follows:

Within the landscape

- Infrastructure continues to be a limiting factor. A key goal for digital banks is to improve basic financial services access and inclusion to the unserved/underserved communities, where it is hoped that a more mobile-centric approach could assist with penetrating these markets. We learned that while the digital banks have developed a robust digital framework to onboard customers (i.e. facial recognition, e-KYC), the lack of existing basic infrastructure has led to several complications.

As digital apps or platforms are developed in accordance to the latest mobile operating systems (Apple or Android), there still exist pockets of customers whom still depend on older, outdated devices which are not supported and hence are unable to install newer applications. Meanwhile, part of the verification and onboarding process requires new users to be able to deposit money into Aeon Bank (and other digital banks) via bank transfer. Unfortunately, the unserved communities too may not have access to these basic facilities to be able to tap into digital banking propositions.

We understand that as an association, Aeon Bank and other players have shared these complications to Bank Negara. While we do not expect this to lead to any changes in objectives for the digital bank, we take comfort that regulators are actively supporting the relatively new industry and are in tune to develop solutions together.

- Greater use may remain untouched by target markets. It is expected that early adopters of digital banking products (especially deposits) would mostly comprise of M40 and T20 customers. When financing products are eventually launched (Aeon Bank is hopeful to introduce in 4QCY24), credit assessments criteria may be more available to the same more affluent users as they may dominate transactional volumes.

With fewer data available for consideration (deposit amount, average tenure, spending habits), it may be challenging to ascribe a favourable credit rate to non-frequent B40 customers which are not reflective of their supposed credit risk, hence further keeping these products out of reach. To circumvent this, Aeon Bank may consider blended financing products in the future (subject to the review and approval of Bank Negara).

Aeon Bank’s drivers

- Tapping on existing channels for a head start. Publicly launching on 26 May, Aeon Bank started building its depositors base with the added incentive of loyalty points to be spent in Aeon shopping malls. It appears Aeon Bank has total of 65k sign ups since launch with 45% being new-to-Aeon.

• Competing with functionality. Although Aeon Bank does not appear to offer the highest deposit rate and at a monthly rest (as opposed to daily rest from its peer), the group opines that it provides more use case within its platform (i.e. integration with Aeon retail, budgeting) which could make customers more sticky. It also plans to expand its enterprise-focused use cases with the onboarding of more business-centric accounts in the future.

- Joint ecosystem helps all. While digital banks do not have any physical presence through branches, Aeon Bank could capitalise on the footprint of the Aeon retail malls and AEONCR’s branch network to strengthen market awareness. Meanwhile, as certain customers may have opted away from AEONCR’s financing products after establishing a CCRIS record, Aeon Bank’s eventual lending propositions could close the lapse in terms of ease in accessibility. Additionally, as the group builds its AEON Living Zone ecosystem, more opportunities to cross sell products may materialise with its captive markets of Aeon customer and possibly increase overall transactions across all brands.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM8.55. Our TP is based on an unchanged GGM-derived PBV of 1.4x (ROE: 15%, TG: 1.5%) against a CY25F BVPS of RM6.12. We continue to laud AEONCR’s fundamentals as they stand out against conventional banking institutions with ROE prospects of c.15% with more modest dividend yields (c.5%). As the digital banking space grows, we believe investors may see such license holders (i.e. Aeon Bank) to possess more value propositions that may embolden the stock attractiveness. Specifically with micro-lending in mind, it could see strong traction in an eventual strong economic growth environment. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5), as we believe better scoring may only be rewarded upon the successful implementation and results in meeting the needs of the unserved/underserved markets.

Risks to our call include: (i) lower-than-expected receivables growth, (ii) extension of moratorium, (iii) higher-than-expected impairment losses, and (iv) lower-than-anticipated write-backs.

Source: Kenanga Research - 18 Jul 2024