Though digital banks have succeeded in raising deposits online, existing ones are hardly afloat perhaps because of consumers’ fear of losing their money to cyber criminals and would rather maintain their physical banking preference.
The S & P Global Ratings report noted that digital banks are unlikely to turn a profit soon faced with bad loans and high operating costs, even as peers in the local banking sector are expected to ride a “robust” economic growth this year, said a report published by the Inquirer.
S & P, however, was more bullish about the entire banking industry for 2024.
The global debt watcher said digital banks’ asset quality “should stay significantly weaker than the sector. We expect these banks to continue making losses because of very weak asset quality and high cost,” the report of S & P said.
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, according to a PDI report.
The Monetary Board licensed six digital bank players namely: 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.
S&P data 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, the report added.
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, S & P explained.
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.”
”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.
It earlier forecast the entire local banking industry growing at 10 to 12 percent this year.
Photo: FitzVillafuerte
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