Fitch Ratings: Digital banks to turn up the heat in ASEAN banking sector

THE proliferation of digital banks in Southeast Asia will intensify competition in the banking sector although the near-term rating impact is likely to be modest for existing rated banks in the region.

This is especially so for larger incumbents that have invested heavily in digitalisation in recent years, according to Fitch Ratings.

“Most digital banks in Southeast Asia have only recently started or are about to commence operations,” observed the rating agency in a non-rating action commentary.

“We expect many of them to be able to grow their customer base quickly thanks to the strong reach of their parents’ ecosystems and their well-resourced backers, in particular those with large incumbent banks and established regional tech players as supporters.”

Additionally, Fitch Ratings expects the funding competition to intensify as digital banks aggressively build their deposit bases which will leave incumbents with weaker deposit franchises facing more competition.

“We believe that many digital banks in the region will adopt an asset-heavy business model with loans acting as a core recurring revenue generator,” opined the rating agency.

“The retail and small medium enterprise (SME) segments are likely to be the most vulnerable to heightened competition, but we think that digital banks are likely to first focus on the low-hanging under-served segments.”

As such, customers who are near the fringes of incumbent banks’ credit risk acceptance criteria are most prone to being poached by the new entrants, according to Fitch Ratings.

“The near-term financial ramifications from the competition posed by digital banks are likely to be modest for the large Fitch-rated banks in the region,” suggested the rating agency.

“This takes into account their entrenched franchises, well-established customer relationships and capacity to invest in their own digital offerings and adapt to such competition.” – Oct 8, 2021

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