New Digital Banks Unlikely To Threaten DBS, OCBC and UOB, Fitch Ratings Says

New Digital Banks Unlikely To Threaten DBS, OCBC and UOB, Fitch Ratings Says

by September 4, 2019
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Singapore’s granting of up to five new digital bank licenses is unlikely to threaten the dominance of the country’s three largest banks, DBS Bank, OCBC Bank and UOB, Fitch Ratings says.

The ratings agency believes that DBS, OCBC, and UOB will remain disciplined and they are also well placed to compete digitally, having invested significantly in their digital capabilities in recent years – a trend they expect to continue as the market evolves.

They do not expect increased deposit competition to pose a material threat to the leading incumbents, as it will take time for new entrants to build trust with customers and capture a meaningful amount of core deposits.

Banking sector competition will increase but is unlikely to erode significantly these banks’ business volumes or profitability because of their strong franchises and growing digital capabilities, and the regulator’s commitment to preventing value-destructive competition, according to Fitch Ratings

They expect the new entrants to increase competition in lending, particularly to more digital-savvy retail and SME customers, despite the regulatory restrictions.

They also expect the digital banks to increase pricing competition for deposits as they become more established and seek to develop their funding bases. Greater competition in the lending market would benefit customers but could increase risk for banks if they relax their underwriting standards or under-price risk in an attempt to capture or defend market share.

They anticipate that the new licences are likely to create new partnership opportunities between banks, non-bank financial institutions, fintechs, and even corporates.

OCBC is reportedly in talks with Singtel, the leading telecom provider in Singapore, to partner-up for a virtual bank license. These tie-ups could eventually enhance incumbents’ franchises, through cross-selling and by leveraging each partner’s digital platforms and capabilities.

New dynamism in the banking system could help more customers to access credit, such as higher-risk SME borrowers, which often face greater hurdles in borrowing from banks.

Digital banks, potentially linked to technology companies and with access to a wide range of customer data, may be better able to serve a broader range of customers by assessing their credit profiles using non-traditional data.

Fitch Ratings believes the under-served market would be fairly small domestically as Singapore is well-banked, but it could prove a fertile test-bed for new entrants before they launch operations in more lucrative markets in the region.

While large incumbents are believed to be insulated from the risk of being disrupted by digital banks, a separate report by Moody’s indicates that smaller banks are at risk.

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