Incumbents risk just 3-5% asset base erosion from upcoming digibanks: Jefferies

Singapore

AMID the liberalisation of Singapore's banking sector with digital-only entrants, the incumbents "at best" face significant competition for 3 to 5 per cent of their asset base, according to a report by Jefferies on Friday.

But that competition cannot be underestimated because the key advantage of technology firms, and those that concurrently offer financial services, is that they "get almost a real-time 360-degree view of their customers", said Krishna Guha, equity analyst at Jefferies.

Mr Guha noted in the report that a key long-term threat for local banks would be the loss of extra information in assessing client risk profile, in the event that existing customers divert part of their business to new players or expand in other geographies through new entrants.

As tech-enabled financial services are not hindered by the pace of branch roll-outs, Singapore's local banks will have to compete on the same terms in geographies where financial services penetration is low.

Grab Holdings and Singtel recently announced their 60:40 proposed partnership for a digital full bank licence, while Razer Fintech made public its consortium comprising multiple partners including a private vehicle of the founders of Sheng Siong Group.

On the technology and e-commerce front, Grab is a leading regional "superapp" and operator of GrabPay wallet. Its partner Singtel has long-standing experience in communications technology and also dabbled in financial services through its mobile wallet Singtel Dash and VIA, a cross-border mobile payment alliance, said Mr Guha.

In terms of deposits, Mr Guha said: "Assuming that new entrants offer 3 per cent on a six-month deposit, it will be serious competition given that current comparable deposit rates are about 1.5 per cent."

In unsecured lending too, incumbents are also likely to face competition given the rates that banks and non-bank financial institutions charge for such loans.

While local banks currently dominate unsecured lending, it is an avenue for Singapore's new digital banks to generate profit.

But as things stand now, Mr Guha does not see a major threat to incumbents just yet.

By his estimate, the total unsecured book - excluding credit cards - is valued at about S$50 billion. Though that may see asset yield compression, the three local banks have about S$1.5 trillion of assets, of which half originate within Singapore, he noted.

"So, at best, the incumbents face significant competition for 3 per cent to 5 per cent of asset base. In our view, the three local banks have steadily invested in digitalisation. This should augur well for them to face new competition," he said.