This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

OF Malaysia’s eight domestic banking groups, RHB Bank Bhd (KL: RHBBANK) boldly stands out as the only one to have invested in a separate digital bank licence, while simultaneously pursuing its own digitalisation agenda like the rest of its peers. Will the move pay off?

The mid-sized lender — the country's fourth-largest bank by assets — made a strategic decision in 2021 to take up a 40% stake in a digital bank venture with Boost Holdings Sdn Bhd (an indirect subsidiary of Axiata Group Bhd [KL: AXIATA]), which owns the remaining 60%.

RHB group managing director and group CEO Mohd Rashid Mohamad says there are no regrets about venturing into the upcoming digital bank, dubbed “Boost Bank”, as it could complement the group's efforts to serve the unserved and underserved market segments, which often do not fit the risk appetite of a conventional bank.

“We received approval [to begin operations] from the Ministry of Finance and Bank Negara Malaysia on Jan 15. Since then, the team has been working on alpha testing, starting with selected internal employees, family and friends. The public launch is slated for the first half of the year,” he tells The Edge in a recent update.

The Edge is given to understand that the public launch is imminent. Rival GXBank, a digital bank led by Grab Holdings Ltd, was the first of the five Bank Negara licensees to launch to the public. It made its debut on Nov 30 last year.

Rashid says Boost Bank aims to kick off with liability products — that is, savings accounts — before eventually branching out into lending products.

RHB's partner in the digital bank, Boost Holdings, is 78%-owned by Axiata Digital Services Sdn Bhd (ADS) while 22% is held by Great Eastern Digital Pvt Ltd. ADS is 96.7%-owned by Axiata Group, with the remaining 3.3% stake held by Mitsui & Co Ltd.

Asked about RHB’s financial commitment to Boost Bank, Rashid says: “To start with, we have agreed on the exact amount of capital we want to come in with”, but declines to reveal the approved capital allocation for the digital bank.

Based on stock exchange filings, RHB and Boost Holdings have each made five capital injections into the digital bank since March last year (see table). As at April 15, RHB had contributed a total sum of RM89.8 million, while Boost Holdings poured in a total of RM134.7 million, bringing the total paid-up capital for the digital bank to RM224.5 million.

Rashid assures that the capital replenishments are within the allocation approved earlier by both parties.

“Every time we capitalise, the other side capitalises as well, to maintain that 40:60 ratio. There is a choice, actually, to contribute [capital] in a bigger amount at one go, or on a gradual basis. Based on the discussion that we had with our partner, [the agreement] is to do it gradually,” Rashid says.

“But, it is safe to say that these are within the capital allocation that was approved earlier. So, we are not going beyond that. Whatever we have approved earlier for a 40% stake [in Boost Bank], X amount of capital, it’s now [still] within that X amount of capital.”

In Malaysia, Bank Negara requires a digital bank to maintain minimum capital funds of RM100 million, unimpaired by losses, during its foundational phase — meaning, the first three to five years. After the foundational phase, the amount increases to RM300 million.

Rashid has realistic expectations as to when Boost Bank will start making a profit, pegging it at around the fourth or fifth year following its public launch. “Typically, we see some of the digital banks around the world start making money in the fourth to fifth year from launch. What is key is how fast we can put in place a [lending] product.”

Rashid is of the view that the partnership with Axiata is not merely a financial venture but a strategic alliance that leverages both parties’ strengths, instead of cannibalising one another.

“Bank Negara is also very clear about who these digital banks are going to be serving — the underserved and unserved. You’re right, I cannot safely say that they [Boost Bank] will not encroach into our customers. But for us at RHB, when we look at this joint venture, it’s more about complementing than competing with our larger scale of business,” he explains.

“It doesn’t mean that [RHB] will stop developing or improving its delivery channels to its own customers. No, we are also improving, we are also going more into digitalisation. But the set of customers that will come to us as compared to those digital banks is different.”

He adds: “The more I understand about the framework and the business model of digital banks, the more it gives me comfort. Because of the type of customers that they will be assessing, the type of loan that they are doing, they're taking a bit more risk as compared to [incumbent] banks [like us],” he says.

As an example, he points out that RHB does a lot of corporate social responsibility work in terms of uplifting micro, small and medium enterprises (SMEs) through its #JomBiz programme. “These are micro SMEs that are not bankable to us, but they will naturally go to the digital bank. Similarly, as part of a cross-referral arrangement, if there is anything big that comes to the digital bank, it will be referred to us (RHB). So, we complement rather than compete with each other.”

Even though GXBank has already kicked off, it does not necessarily mean Boost Bank has lost first-mover advantage, according to Hong Leong Investment Bank Research analyst Chan Jit Hoong, who observes that Bank Negara requires digital banks to cap their assets at RM3 billion within the first three to five years of operations.

“All of them have asset limits. So, Boost Bank can always play catch-up. The existence of digital banks in Malaysia is to serve the underserved market. The pie is big enough for everyone,” he tells The Edge, adding that the key to winning in the digital banking landscape is a good service level, competitive rates and the ability to onboard good-paying customers.

S&P Global Ratings analyst Nikita Anand observes that the digital banking landscape brings both opportunities and challenges, particularly with initial operational constraints and potentially higher funding costs.

She points out that, like other recent digital bank launches, particularly in regions such as Southeast Asia, these banks are inclined to offer higher deposit rates to attract funding.

Anand notes that these digital banks often target segments traditionally overlooked by mainstream banks, such as small businesses and gig economy workers.

“These segments are underserved by traditional banks due to the difficulty of obtaining collateral and assessing the cash flow and payment ability of such borrowers. The size of the addressable market is relatively small, given Malaysia’s saturated banking sector,” she says.

Anand does not expect digital banks to threaten the existence of established lenders, given the uphill battle faced by these fledgling financial institutions, as they lack scale and customer trust.

“We note that the initial phase of operations will be challenging, as observed in recent digital bank launches in the neighbouring banking sector of the Philippines. Asset quality is significantly weaker than that of traditional banks due to the largely untested credit profile of target segment and underdeveloped collection mechanisms,” she says.

As Boost Bank prepares for its public launch, all eyes will be on its performance and ability to integrate seamlessly into the digital banking landscape.  

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