In a statement, Fitch said there was a long-term future for digital banking in Malaysia, but predicted that these banks would assume niche market roles in the medium-term.
“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.
“Bank Negara Malaysia (BNM)’s licensing framework caps the digital banks’ assets at RM3 billion (US$688 million) 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 assumptions,” it said.
Last week, BNM announced that digital banking licences had been granted to five consortia, among them the owners of the Grab mobile delivery company, Shopee online market, and fintech company, Boost.
Three consortia were granted general licences: Boost Holdings Sdn Bhd-RHB Bank Bhd (Boost); GXS Bank Pte Ltd-Kuok Brothers Sdn Bhd (Grab); and Sea Ltd-YTL Digital Capital Sdn Bhd (Shopee). Two were granted Islamic banking licences: AEON-MoneyLion Inc; and KAF Investment Bank Bhd.
Fitch said there were other structural market hurdles for digital banks to overcome before becoming profitable, including competitive pricing and major local banks’ formidable market share.
“Major local banks are, in our view, 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.
“However, economies of scale will be elusive amid the size cap and competition is likely to be acute. Near-term asset-quality risks are high, as the banking sector is emerging from a period of extensive debt relief.”