Asia Pacific Equity Research17 July 2019 Hong Kong Banks101 on Virtual Banks - The Game ChangersBanks & Financial ServicesKatherine Lei AC(852) 2800-8552katherine.lei@jpmorgan.comBloomberg JPMA LEI J.P. Morgan Securities (Asia Pacific) LimitedJemmy S Huang AC(886-2) 2725-9870jemmy.s.huang@jpmorgan.comBloomberg JPMA JHUANG J.P. Morgan Securities (Taiwan) Limited/ J.P. Morgan Securities (Asia Pacific) LimitedLeo Weng(852) 2800-8511leo.weng@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) LimitedGeorge Cai(852) 2800-8557george.cai@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) LimitedDaqi Jiao(852) 2800-8595daqi.jiao@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) LimitedInternetAlex Yao(852) 2800-8535alex.yao@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) LimitedSee page 37 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.www.jpmorganmarkets.comHKMA issued full banking licenses to eight virtual banks (VBs). We believe this could be a game changer for HK banks, which reported materially higher retail ROA than peers in other regions. In our opinion, the VBs will disrupt the incumbents if they are able to offer a seamless user experience while managing key risks. Small banks (BEA & DSBG) may see higher earnings risk in initial years, and deposit leaders (i.e., HSBC & HSB) are likely to lose market share in the years to come, leading to concerns on stock de-rating. We prefer BOC HK and STAN, which are first-movers into VB business. Execution ability of VBs remains a key swing factor. Key facts of VBs: There is no written limit on the business scope of VBs. However, there is soft hurdle on scope as VBs have to demonstrate their ability to manage risks (i.e., cyber security, AML, and credit and liquidity risk, etc.)when rolling out new services. Tables 1-2 show background information on the eight VBs. We highlight Livi and Infinium based on our scorecard (page 8). Key challenges for VBs: The biggest challenge is to create a smooth user experience for customers while adhering to all the risk management and compliance measures. This will be essential to VBs’ deposit-taking ability. VBs are likely to leverage technology as highlighted in Table 4 to overcome some of the obstacles. In addition, VBs are not allowed to participate in predatory behavior, resulting in substantial losses in initial years. This limits their ability to aggressively gain deposits market share (i.e., offer high-yield deposits) by offering materially higher-yield products. Key opportunities for VBs: Banking penetration in HK is lower than those in DM markets (Table 9, page 17), particularly in retail and SME segments. HK banks’ retail ROA is higher than other regions (Figure 2, page 17), partly due to low deposits cost. We expect VBs to take up to 0.8% of deposits market share by 2020. On the asset side, they may target the near-prime retail customers who borrow from high-yield lenders (i.e., UA Finance), which report average APR (annual percentage rate) of ~30%. On SME loans, VBs may target those borrowing from factoring companies at ~10-15% APR. Quantifying the addressable market for VBs: We estimate VBs to take up to 1.0% and 0.8% of market share in terms of loans and deposits by the end of 2020. And aggregate revenue could be HK$6.5bn in 2020e, equivalent to about 1.2% of total banking revenue (Table 13, page 21). Their share on banking profits will be lower due to high cost-income ratio at initial years and elevated credit costs due to higher inherent risk of their target borrowers segment. VB’s disruption to incumbent banks: VBs will disrupt the incumbent banks on the liabilities side (i.e., deposits) and non-bank lenders on the assets side we believe. However, the initial impact is inflicted by banks positioning pre-emptively for the VB challenges. Banks have raised time deposit rates and waived account service fees in recent weeks. Static sensitivity analysis shows this could lead to 2.5%-9.7% downside on HK banks’ 2020e profits (Table 17, page 23); this is not our base case. We think BEA and DSBG will see higher negative impacts than peers. In the longer run, banks which profit from strong liabilities franchises, such as HSBC & HSB, will lose deposits market share and see de-rating risk in our view.更多资料欢迎添加微信：zsxf20172Asia Pacific Equity Research17 July 2019Katherine Lei(852) 2800-8552katherine.lei@jpmorgan.com Table of ContentsInvestment summary – understanding the disruptors..........3What are the key challenges for VBs?......................................................................3What are the opportunities for VBs?...............................
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