KUALA LUMPUR (Aug 22): RHB Research sees AEON Credit Service (M) Bhd as a good proxy to ride the growth prospects of digital banks in Malaysia, taking a view that the credit service provider's existing "entrenched presence" in the underserved market will help.

RHB Research pointed out that customer acquisition that results in high marketing costs will be the key challenge for digital banks to turn profitable.

"AEON [Credit]'s familiarity with the underserved segments, coupled with the technological capabilities of MoneyLion (data analytics and artificial intelligence [AI]), would enable the new digital bank to develop a robust credit risk assessment framework, and better assess business opportunities.

"Being already in the right market segment, the new digital bank would have a head start in meeting BNM's (Bank Negara Malaysia) financial inclusion agenda. With targeted customers already familiar with the AEON brand, this should also mean lower acquisition costs versus other new digital bank entrants," said RHB Research.

The research outfit highlighted that AEON Credit already has a vast ecosystem of 4.4 million customers, including from sister company AEON Co (M) Bhd, which operates retail malls and a supermarket chain, and has partnerships with more than 2,000 suppliers, tenants and business associates.

To recap, the AEON-MoneyLion consortium has won the bid for an Islamic digital bank licence, in which AEON Financial Service Co Ltd and AEON Credit will each have a 45% equity interest, while MoneyLion will hold the remaining 10% stake. BNM issued five digital banking licences earlier this year.

The other four digital bank licence holders are a consortium of Boost Holdings Sdn Bhd and RHB Bank Bhd; a consortium led by Grab, Singapore's GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; a consortium led by Sea Ltd and YTL Digital Capital Sdn Bhd; and a consortium led by KAF Investment Bank Sdn Bhd.

RHB Research added that AEON Credit's technology partner, MoneyLion, is a full-service digital platform that delivers mobile banking, investment solutions and personalised solutions to middle-class Americans since its launch in 2013.

"MoneyLion has been investing in the forefront of AI technology powering end-to-end solutions from credit underwriting, fraud detection, design, and product operations," it noted.

Citing data compiled from BNM, as well as Google, Temasek, Bain & Company E-Conomy SEA, and Momentum Works, RHB Research highlighted that 45.5% of Malaysian population are banked, while 40.9% are underbanked and the remaining 13.6% are unbanked.

It also said that the main problems for the underbanked and unbanked are insufficient credit history or income, limited physical access to bank branches and lack of education or financial literacy.

"In Malaysia, AEON Credit is a well-established provider of personal financing schemes for the lower-income earners and small businesses, product financing (hire purchase financing for two-wheelers and four-wheelers, white goods and smart mobile devices), issuance of credit cards and prepaid cards, and SME equipment financing via AEON Biz-Plus."

It recommended "buy" for AEON Credit with a target price of RM16.60.

RHB commented that valuing start-up digital banks using the conventional Gordon growth model (GGM)-derived price-to-book value would not be meaningful, given the expected losses or very depressed returns on equities in the initial years.

"Given the focus on customer acquisition in the initial years, we believe that market cap per customer — a valuation based on the size of the customer base — would be appropriate.

"As digital banks grow and mature over time, the GGM approach remains relevant as digital banks, like incumbent banks, are subject to regulatory requirements for capital, liquidity and compliance," it said.