New digital banks profitable in 3 to 5 years — S & P

MANILA, Philippines — Digital banks in the Philippines need three to five years to become profitable as big lenders continue to dominate the local banking landscape, according to S&P Global Ratings.

In a report titled, “Philippine banks on the cusp of a digital revolution,” the debt watcher said digital banks are set to redefine the industry as the COVID-19 pandemic has forced incumbents to step up their digitalization efforts.

“Digital banks will likely need three to five years to become profitable as they scale up in markets largely ignored by the big lenders. Incumbent banks will step up their digital efforts, particularly as the COVID-19 outbreak has increased the popularity of electronic transactions,” S&P primary credit analyst Nikita Anand said.

Anand said virtual banks have a huge opportunity in the Philippines as the youthful demographics, large untapped market, low costs and regulatory latitude would help the early entrants.

She said large banks should retain their market share over the next three to five years, supported by their strong brand recognition and longstanding customer relationships.

According to S&P, digital banks could carve a niche in small-ticket loans as displacing mass-affluent market would require superior, as well as cheaper products and services.

Major players in the country include Malaysia’s CIMB Bank Bhd, which launched an all-digital and mobile-first app in 2018, followed by ING Bank NV with an all-digital platform introduced in 2019. Others include Singapore-based Tonik Financial Pte Ltd and Overseas Filipino Bank of state-run Land Bank of the Philippines.

Anand said digital banks have cost advantages over their brick-and-mortar counterparts as big banks need to manage sizeable overhead costs, a less agile culture and legacy systems that inhibit change.

These advantages, she said, allow digital banks to offer higher deposit rates of three to four percent versus the 0.1 to 0.25 percent offered by  regular banks.

“We believe the entry of new digital banks may accelerate innovation in the banking sector, raising technology investments over the next few years. Traditional banks with large, well-established client bases and wide resources are better prepared to take on virtual banks, as compared with small banks or stand-alone fintech companies,” Anand said.

S&P said the Bangko Sentral ng Pilipinas (BSP) have been supportive of digital banks through lower barriers to entry by imposing a paid-up capital of P900 million versus the P2 billion to P25 billion threshold for universal and commercial banks.

“We believe the BSP could follow a phased implementation of digital banks, giving them some lead time before bringing regulations on par with the universal and commercial banks,” Anand said.