KUALA LUMPUR (April 13): S&P Global Ratings sees significant opportunities for digital-only banks in Malaysia, although new entrants will face an uphill battle in the competitive market amid operational and credit challenges.
The ratings agency believes that Malaysia has a fertile ground for fintech.
In a report today, it said the country’s market infrastructure offers a highly supportive environment for digital banks and fintech to flourish, citing reasons such as high internet and mobile phone penetration rates as well as the rise in popularity of mobile and internet banking even before the pandemic.
S&P noted that the successful applicants for digital bank licences in Malaysia will likely share similar business profiles as the two successful applicants in Singapore — the Grab-Singtel consortium and SEA Group — with strong digital competency in their existing domains.
Grab has 40,000 active private-hire drivers, 6,000 GrabFood riders, and more than 12,000 GrabFood and GrabMart merchants in the city-state, while its consortium partner Singapore Telecommunications Ltd (Singtel) is the country's largest telecom operator, with 4.3 million mobile subscribers and a market share of more than 50%, it added.
Meanwhile, SEA Group, the parent of e-commerce platform Shopee, registered monthly traffic of 14.1 million hits on its Singapore website in the fourth quarter of 2020 amid the pandemic.
“We believe both companies can use the wealth of proprietary customer data collected on their platforms on consumers and merchants to drive initial growth and support credit underwriting of their planned digital banks,” S&P stated in the report.
Given the lower capital threshold required in Malaysia of RM300 million versus Singapore’s S$1.5 billion, it added that smaller fintech companies with strong technology are also well-placed to succeed.
Even so, the ratings agency opined that digital-only banks will not be an immediate threat to established lenders.
“In such a competitive market, new entrants face an uphill battle. In addition to having to carry a much riskier portfolio, new players face many regulatory and operational constraints,” it said.
The credit cycle triggered by Covid-19 has shown how difficult it can be for small digital banks to stay afloat during a crisis, it said, adding that even if all five digital banks navigate the three- to five-year foundational phase laid out by Bank Negara Malaysia, their combined market share is unlikely to reach 0.5% of total banking sector assets.
The Malaysian banking regulator has announced that up to five digital banking licences will be granted by the first quarter of 2022.
S&P does not expect an immediate shakeup to the competitive landscape when new players join the game, but instead, incremental changes are likely to lead to a more dynamic, diversified industry.
The ratings agency expects the two largest banking groups — Malayan Banking Bhd and CIMB Group Holdings Bhd — to be the best placed to fend off the new competition, given their established digital infrastructure, diversified earnings profiles and large customer bases.
Nevertheless, S&P sees “further room for even the leading Malaysian banks to increase investment in technology”.
“The gap with the most digital-focused banks in the region is still significant. For example, technology investment (excluding human resources) at DBS was S$1.09 billion (RM3.354 billion) in fiscal 2020 (ended Dec 31, 2020), roughly 17% of its overall operating expenses. China-based WeBank Co Ltd, 30%-owned by Tencent Holdings Ltd, committed 25% of its operating expenses to research and development in 2019, and over 50% of its headcount works on IT, meaning it has a completely different employee skill profile to traditional banks,” it pointed out.