Virtual banks face wait for profits

Winners of the Bank of Thailand’s virtual bank licences are likely to struggle to turn a profit early on because the business usually burns cash during the first five years, says KGI Securities.
Siam Commercial Bank (SCB) should benefit less from a licence than the two other Thai banks applying, said the brokerage.
Among the five contenders, three groups are led by three Thai commercial banks: Krungthai Bank (KTB), Bangkok Bank (BBL) and SCB. The two other groups are a Charoen Pokphand (CP)-Ant Group alliance and a Lightnet Group-WeLab tie-up.
The central bank prefers newcomers who use open data and technology to improve financial inclusion, said KGI bank analyst Chalie Kueyen.
The applications will be reviewed for around six months, with winners required to operate under a trial period of 3-5 years with initial paid-up capital of 5 billion baht, according to central bank conditions.
This amount rises to 10 billion baht after the trial period ends and they become fully functioning banks.
“Among the five groups, KTB, CP and BBL are the likely winners because of their big data advantages and ability to penetrate unbanked customers to promote financial inclusion,” said Mr Chalie.
“SCB and Lightnet Group need to compete against each other.”
KGI noted most virtual banks developed in Asia aim to compete with existing conventional banks, tapping all business segments and customer types.
Specialist banks focus on leveraging growth using founders’ expertise.
“Virtual banks for all platforms in Singapore, Malaysia and Indonesia require heavy investment and operate at a loss for at least 3-5 years,” he said.
Only specialised virtual banks in South Korea have been able to turn a profit within three years of operation as they focus on specialist business and cryptocurrency, and there are no regulatory restrictions on business expansion and their scope of business, said Mr Chalie.
Virtual banks generally compete on deposits and fee income in the first phase of operation.
“But the Bank of Thailand requires virtual banks to pay deposit guarantees of 0.4% of their deposit base, similar to commercial banks, which will limit their cost advantage to operate lending businesses,” he said.
KGI believes among the three local banks that applied for licences, virtual banking would benefit KTB and BBL, “but should not benefit SCB” if it uses virtual banking for retail banking.
All five applicants are alliances between large local conglomerates and overseas virtual banks.
“BBL has low exposure to retail business, as retail loans account for less than 15% of its total loans,” said Mr Chalie.
“A virtual bank business for this bank is ‘better than nothing’ and the large retail customer bases of its consortium partners could offer BBL some upside.”
KTB and its partners could benefit the most in terms of taking alternative data from Advanced Info Service and improving cash collection and asset quality, then growing its digital lending, according to KGI.
SCB has a strong retail client base in mobile banking in terms of transaction numbers and customer penetration.
The bank already has a platform for loan applications, so the positioning of virtual banking should be for new business, said Mr Chalie.
SCB selected KakaoBank as a partner, which could position its virtual bank for growth in the cryptocurrency business, he said.