Digital banks struggling to stay afloat, says S&P

MANILA, Philippines  -Digital banks are unlikely to turn a profit anytime soon as they grapple with bad loans and high operating costs, all the while the local banking sector is expected to ride a “robust” economic growth this year, S&P Global Ratings said.

“Digital banks’ asset quality should stay significantly weaker than the sector,” the global debt watcher said in a commentary on Tuesday. “We expect these banks to continue making losses because of very weak asset quality and high costs.”

The Bangko Sentral ng Pilipinas (BSP) earlier raised the same concern on digital banks, although the regulator said these lenders were nevertheless doing well in raising deposits online.

Digital banks

The Monetary Board has given digital banking licenses to six players: UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank of state-run Land Bank of the Philippines, Tonik Digital Bank and Maya Bank.

S&P said digital banks were having a hard time deploying new credit because of their “heavy exposure” to unsecured consumer loans and the “largely untested credit profile” of their target customers.

Data compiled by S&P showed that 20 percent of the entire credit portfolio of digital banks had turned sour as of November 2023, significantly higher than the 3.4 percent ratio recorded for the entire Philippine banking industry.

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, the debt watcher explained.

READ: BSP: Digital banks struggling with loan collections

In turn, the very high provisioning against soured loans is adding to digital banks’ already elevated expenditures. Despite having the advantage of branchless operations, S&P said these lenders’ operating costs, as a share of their revenues, are “very high currently.”

Moratorium

”This is because their revenue base is narrow given nascent operations,” the credit rating agency.

Digital banks spent about 94 centavos to earn every peso in the first nine months of 2023, much higher than the 57 centavos average cost incurred by the rest of their local banking peers.

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

Zooming out, S&P’s pessimistic outlook for digital banks was a stark contrast to its bullish forecast for the entire local banking sector. The group said the credit growth of the entire local banking industry is expected to hit between 10 to 12 percent this year, after a subdued 5 to 6 percent expansion in 2023.

“Philippine banks are well-placed to ride the country’s robust economic growth in 2024,” S&P said. “We believe improving macroeconomic conditions will offer good growth opportunities along with stable asset quality.” INQ