KUALA LUMPUR: Digital Banks are expected to challenge the incumbent banks through the introduction of more customised products/services, at lower switching-cost, said Affin Hwang Capital..
Bank Negara Malaysia is set to announce the five digital bank licences by end-March 2022.
Affin Hwang said the entrance of the new players would potentially create game-changers to the domestic financial services industry, although the main focus was on reaching out to the 'unserved' and 'underserved' segments.
It said the Malaysian financial ecosystem had evolved with many non-traditional banking players now in the financial space nibbling at fee income opportunities through the users' switch to electronic payments (e-payments).
"This is despite having a high banking penetration rate of 96 per cent in our country and 'agent banking services'.
"The entry of digital banks into our ecosystem is both disruptive in the near term and also value-creating in the long run," it said.
Affin Hwang said entities with joint venture (JV) exposure to these digital banks might not see a significant financial impact at the associate line on their P&L (profit and loss) or on their valuation during the foundational years.
The firm is of the view that profitability of the digital banks within the first five years will not be material.
"Based on the feedback received, we understand that the JV partners would need to pump in additional equity capital in the event that the capital funds of the DB falls below the RM100 million threshold.
"In spite of this, in the near term, we do not think it will be a material drag on the P&L of the JV partners, unless the losses are much wider than anticipated," it said.
Affin Hwang has remained "Overweight" on the mainstream banking sector, noting the attractive risk-reward profile of its coverage.
"Banks fit into the reopening theme, with an interest rate upcycle and potential write-back of overlay reserves.
"Our preferred picks include Malayan Banking Bhd, Public Bank Bhd , Alliance Bank Bhd and CIMB Bank Bhd," it added.