Bangko Sentral ng Pilipinas Governor and Monetary Board Chair Eli Remolona, Jr. | PHOTO: Official facebook page of the Department of Finance
MANILA, Philippines — Only two of the six digital banks in the country are profitable, with losses likely to persist in the medium term as the nascent industry continues to find the right business model for their target market with a largely untested credit profile.
“There are two among the six banks that are profitable, but the expectation is that it would take about five to seven years before a digital bank becomes profitable,” Bangko Sentral ng Pilipinas (BSP) Director Melchor Plabasan said at a press conference.
The BSP declined to identify the two, but the six digital banks operating in the country are UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank of state-run Land Bank of the Philippines, Tonik Digital Bank and Maya Bank.
That most are not profitable yet is not unique to the Philippines.
READ: Digital banks struggling to stay afloat, says S&P
Plabasan shared that today, only 5 percent of digital banks globally are profitable.
“So, we are expecting that there will be losses,” said Plabasan, adding that the BSP does not expect that some will be out of the red in five to seven years.
Bad loans
The struggle to turn profitable stemmed from digital banks’ problems with their lending activities, BSP Governor Eli Remolona Jr. said at the same news briefing.
Data from the BSP showed that 14.49 percent of the entire credit portfolio of digital banks had turned sour in 2023, significantly higher than the 3.24-percent ratio recorded for the entire Philippine banking industry.
READ: BSP: Digital banks struggling with loan collections
That problem is forcing digital banks to set aside a hefty amount of their capital as a buffer against losses from unpaid loans instead of using the money for new lending activities. In turn, the very high provisioning is adding to digital banks’ already elevated expenditures.
For this reason, Remolona said that while digital banks are doing well in raising deposits online, the BSP is “not yet comfortable” with the industry’s overall performance—a deciding factor for regulators to welcome new players or not.
“I think many are interested, quite a few are interested, and they can’t wait for us to open it up,” the BSP chief said. “We’re looking at what’s going on and we’re trying to understand the new business models that they bring.”
Moratorium
In 2021, the BSP imposed a three-year moratorium on applications for digital banking licenses to give the regulator enough time to monitor the performance of this new breed of lenders and their impact on the financial system. The central bank will release an industry report within the first quarter of the year.
READ: BSP imposes 3-year moratorium on digital bank licensing
Plabasan said the upcoming industry report of the BSP would include recommendations on whether the time is right to accept more players in the industry.
“We are expected to submit an industry report and part of that report is a recommendation on whether to, let’s say, is it going to be a partial lifting, is it complete lifting, or is it going to be an extension of the moratorium,” he said.
”But so far, the six digital banks have already generated around 8.7 million deposit accounts which represent around 7 percent of the total of the Philippine banks,” he added.