This article first appeared in The Edge Malaysia Weekly on October 17, 2022 - October 23, 2022

AEON Credit Service (M) Bhd, which in April clinched one of five digital bank licences issued by Bank Negara Malaysia, expects its upcoming digital bank to start making a profit upon 4½ years of operations.

“We’re looking at year four and a half to make a profit, and to recover the cumulative losses [of the first few years] in the seventh or eighth year,” chief transformation officer Ajith Jayaram tells The Edge.

Bank Negara requires digital banks to break even within the first five years of operations.

According to Ajith, AEON Credit anticipates its digital bank being “operationally ready” — that is, having its first product, a particular type of savings account, ready for a test run — by October 2023. However, the actual launch date of the digital bank will be subject to Bank Negara approval.

“[Our] actual go-to-market should be in the first quarter of the following year (2024),” he says. “We’ll have the basic savings [account] and current account [products], as well as loan products — microfinancing, short-term financing.”

A Main Market-listed consumer finance company, AEON Credit clinched an Islamic digital bank licence on April 29 as part of a consortium with its parent company AEON Financial Service Co Ltd (AFS) and fintech firm MoneyLion Inc as its technology partner. AEON Credit and AFS will each have a 45% stake in the bank, while MoneyLion will hold the remaining 10%.

The only other recipient of an Islamic digital bank licence was a consortium led by KAF Investment Bank Sdn Bhd.

Providing an update on the digital bank’s development, Ajith says, “It’s more dynamic than what we expected. There’re a lot of things to do. There’ve been a lot of changes and adjustments from what [we initially penned] on paper.”

It is understood that the digital bank will focus mainly on retail financing within the AEON ecosystem.

Industry observers say it is unlikely that AEON Credit’s digital bank will be the first of the five to be launched. Grab Holdings Inc is seen as the most likely to launch first as it is said to be the most advanced in getting things moving, having already launched one in Singapore last month in partnership with Singapore Telecommunications Ltd (Singtel).

Grab is expected to launch its digital bank in Malaysia next year. It owns the bank as part of a consortium with Singtel and Kuok Brothers Sdn Bhd.

As per regulations, all five upcoming digital banks have to undergo a period of operational readiness, to be validated by Bank Negara through an audit that may take 12 to 24 months, before they can commence operations. Industry sources say one of the biggest challenges faced by the five players is hiring staff with the needed technology skill sets.

“There’s a shortage of talent. There’s also a talent drain, with many running to Singapore now because of the stronger currency,” one tells The Edge.

Kenanga Research points out that as AEON Credit holds just 45% of the digital bank, it will only inject up to RM90 million in terms of capital.

“Additionally, the group seeks to appoint a separate team of vendors and consultants in the development of the digital bank, owing to different expertise required. That said, it would not leave any impact on [AEON Credit’s] earnings in the near term,” its analyst Clement Chua says in an Oct 3 report.

AEON Credit’s recent financial results indicate signs of growing asset quality stress amid a rising interest rate environment. It provides personal, motorcycle and used-car financing to customers that are mainly from the bottom 40% income group (B40) and other underserved segments.

Two weeks ago, the group reported a net profit of RM75.65 million for the second quarter of the financial year ending Feb 28, 2023 (2QFY2023), which was little changed from the RM75.48 million it made in the same quarter a year earlier, as stronger revenue was largely offset by higher impairment losses. Its impairment losses on financing receivables rose to RM149.95 million from RM92.27 million, while revenue grew 6.6% to RM399.17 million.

This brought its 1HFY2023 net profit to RM238.72 million, which was also little changed from the RM238.58 million it made the year before. Nevertheless, it accounted for about 61% of an analysts’ consensus estimate for the full year, given that the group’s 1QFY2023 was strong.

“While asset quality may be beginning to show signs of stress, we take comfort in the [group’s] strong loan growth and effective cost controls. The stock’s undemanding price-to-book value of 1.2 times provides an attractive entry point, in our view,” says RHB Research in a Sept 30 report. It has a “buy” call and target price of RM15.70 on the stock.

Bloomberg data shows that of the seven analysts who track the stock, five have “buy” recommendations, while one has a “hold” and the other a “sell”. The average 12-month target price was RM15.97. The stock, which had gained just 0.7% over a year, closed at RM13.30 on Oct 12, giving the company a market capitalisation of RM3.39 billion.

“Against conventional banking institutions, AEON Credit commands a leading return on equity of more than 20%, albeit with more moderate dividend yields [4% to 5%]. We continue to expect sentiment for the stock to improve with subsequent updates as a proxy to better gross domestic product output and with its Islamic digital banking licence allowing it to propose new value propositions to customers,” says Kenanga Research, which has an “outperform” call and a target price of RM16.95 on the counter.

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