Rising interest rates, slow economy pummel digital banks

Rising interest rates amid monetary policy normalization is posing headwinds to the financial viability of digital banks in the Asia-Pacific (APAC) region, of which there are only six in the Philippines and have just rolled out full operations.

Fitch Ratings believes this is so especially when compounded with slowing economic growth and tightening funding conditions.

Further, a softer economy could also affect the banks’ target customers disproportionately, raising asset-quality risks.

The credit watcher said in a statement that the current monetary policy tightening cycle will generally support bank credit profiles in Asia, to the extent that higher interest rates lift net interest margins (NIMs).

“However, NIM improvements for digital entrants are likely to be constrained by their more limited pricing power as they seek to boost their deposits and lending business to achieve scale and profitability,” Fitch Ratings said.

“We expect NIMs for these entrants to be more influenced by their risk appetite,” it added. “In general, we believe the best opportunities for digital banks in APAC are in markets with larger unbanked populations.”

Even then, lending to underserved sectors carries higher risk, with their lower income and limited credit history posing key challenges for digital banks trying to crack the market.

“We expect credit costs to rise more significantly for these segments in a higher-interest-rate environment,” Fitch Ratings said.

Local neobanks

Digital banking in the Philippines is just taking root all six of the neobanks to which the Bangko Sentral ng Pilipinas (BSP) granted licenses now given the green light for full operation.

The BSP defines digital banks as having no physical branches, unlike traditional or brick-and-mortar banks. These players’ financial products and services are processed end-to-end through digital platforms or electronic channels.

With a two-year moratorium on giving permits to digital banks in effect, no new entrant is expected until 2024 at the earliest.

Operational firms

So far, only three are now in full gear, namely Tonik Digital Bank Inc., Maya Bank Inc. and Overseas Filipino Bank Inc. or OFBDB, which is a digital banking subsidiary of Land Bank of the Philippines.

Tonik and Maya were issued their certificates of authority to operate in the first quarter this year, and OFBDB in the second quarter.

The other three—UNObank Inc., GoTyme Bank Corp. and UnionDigital Bank Inc.—are expected to launch within the second semester of 2022. INQ