New digital banks unlikely to compete with traditional banks

This is due to the regulatory limits placed on their activities by BNM


THE five new digital banks that have obtained licenses in Malaysia are unlikely to disrupt the banking sector in the medium term.

Fitch Ratings Inc believes that each bank consortium is well-resourced with the potential to become a viable digital bank in the long run.  

“Qualities include broad consumer brand recognition, strong credibility of constituent shareholders, deep pockets to fund necessary investments and the likely availability of management know-how.  

“Execution risks are considerable, but the ingredients to make a foray into the sector are present,” it noted in a statement on Tuesday.

Last Friday, Bank Negara Malaysia (BNM) announced the five consortiums that won the digital bank licenses.

They were Boost Holdings Bhd-RHB Bank Bhd, GXS Bank Pte Ltd-Kuok Brothers Sdn Bhd, Sea Ltd-YTL Digital Capital Sdn Bhd, Aeon Financial Service Co Ltd-Aeon Credit Service (M) Bhd-MoneyLion Inc and KAF Investment Bank Sdn Bhd.

Investors, however, are not too keen on the news as YTL Corp Bhd’s shares are down three sen at 60.5 sen in intra-day today, Axiata’s shares are down six sen at RM3.45, RHB down six sen at RM6.19 and Aeon Credit’s shares are down 52 sen or 3.2% at RM15.38.  

Meanwhile, Fitch Ratings also believe that there is a long-term future for digital banks in Malaysia, particularly in tackling certain niches.  

It added that these tend to revolve around underserved clientele, such as lower-income consumers and micro and small enterprises that lack the collateral or cashflow required by banks to qualify for credit.

“Digital banks are likely to be active in less capital-intensive areas, such as payments and remittances, distribution of third-party investment and insurance products as well as selective lending where there are synergies with their parent eco-systems.  

“For example, there could be a natural fit in payday loans to gig workers or supply-chain financing for e-commerce merchants,” it said.

However, Fitch Ratings stressed that digital banks are not likely to become major competitors to traditional banks within the next five years because of regulatory limits placed on their activities.  

BNM’s licensing framework caps the digital banks’ assets at RM3 billion during the foundational phase, which they cannot exit until at least mid-2026, and potentially as late as mid-2029.

“This means aggregate digital bank balance sheets will be less than 1% of the system in the medium-term under even the most bullish assumption,” it noted.

Fitch Ratings also pointed out that there were other structural market hurdles for digital banks to overcome before becoming profitable, including competitive pricing and major local banks’ formidable market share.

It opined that major local banks are capable of quickly responding to and competing with digital banks.

“The large banks’ incumbency advantage is unlikely to be eroded within the medium term, even if competition intensifies at the margin in areas that the digital banks choose to compete in.  

 “The digital banks are being set up amid an economic recovery that gives the new banks a decent prospect at growing their balance sheets in the initial years,” it said.

However, the rating agency noted that economies of scale will be elusive amid the size cap and competition is likely to be acute.  

It added that near-term asset-quality risks are high, as the banking sector is emerging from a period of extensive debt relief.