New Thai bank licences grapple with early profitability challenges

The winners of the Bank of Thailand’s virtual bank licences are expected to face significant challenges in achieving profitability in the initial years, as the industry typically experiences high cash burn during the first five years, according to KGI Securities.

Siam Commercial Bank (SCB) is projected to benefit the least from a virtual bank licence compared to other Thai banks applying, stated the brokerage.

Out of the five contenders, three groups are led by Thai commercial banks: Krungthai Bank (KTB), Bangkok Bank (BBL), and SCB. The remaining two groups consist of a Charoen Pokphand (CP)-Ant Group alliance and a Lightnet Group-WeLab partnership.

KGI bank analyst Chalie Kueyen noted that the central bank favours new entrants utilising open data and technology to enhance financial inclusion.

The application review process will take approximately six months. Winners will be required to operate under a trial period of three to five years with an initial paid-up capital of 5 billion baht (US$153 million), as stipulated by the central bank’s conditions.

Following the trial period, this amount will increase to 10 billion baht (US$306 million) when they transition to fully operational banks.

Virtual banks

“Among the five groups, KTB, CP, and BBL are the likely winners due to their big data advantages and ability to reach unbanked customers, thereby promoting financial inclusion,” said Chalie. “SCB and Lightnet Group will need to compete against each other.”

KGI observed that most virtual banks established in Asia aim to compete with traditional banks across all business segments and customer types.

Specialist banks, on the other hand, leverage growth based on their founders’ expertise, said Chalie.

“Virtual banks in Singapore, Malaysia, and Indonesia require substantial investment and typically operate at a loss for at least three to five years.”

However, specialised virtual banks in South Korea have managed to turn a profit within three years by focusing on niche markets and cryptocurrency, without regulatory restrictions on business expansion, he said.

Virtual banks usually compete on deposits and fee income during their initial phase of operation.

“But the Bank of Thailand mandates virtual banks to pay deposit guarantees of 0.4% of their deposit base, similar to commercial banks, which will limit their cost advantage in lending businesses.”

Retail banking

KGI believes that among the three local banks applying for licences, KTB and BBL would benefit more from virtual banking, while SCB might not gain as much advantage if it focuses on retail banking.

All five applicants are alliances between large local conglomerates and international virtual banks, said Chalie.

“BBL has low exposure to retail business, with retail loans accounting for less than 15% of its total loans.

“A virtual bank business for BBL is better than nothing, and the large retail customer bases of its consortium partners could provide some upside.”

KTB and its partners are likely to benefit the most by leveraging alternative data from Advanced Info Service, improving cash collection, and asset quality, which can bolster their digital lending, according to KGI.

SCB already possesses a robust retail client base in mobile banking, with significant transaction numbers and customer penetration.

The bank has an existing platform for loan applications, and its virtual banking could be positioned for new business ventures, Chalie suggested, reported Bangkok Post.

SCB’s partnership with KakaoBank might set its virtual bank on a path for growth in the cryptocurrency sector, he concluded.