Singapore banks well placed to manage rising competition from digital banks: Fitch

THE three incumbent banks in Singapore - DBS, OCBC and UOB - could face modest competition from digital banks in the near term, but they are equipped to handle that smoothly, said a Fitch Ratings report on Wednesday.

Amid digital full bank licences being granted to a consortium between Grab and telecommunications operator Singtel, and Sea Limited, the credit ratings agency said that it expects the large banks to face some pressure on net interest margins. This is because it expects digital banks to "compete aggressively" with them for deposits and loans when the digital banks' operations commence.

It, however, anticipates that the digital banks' balance sheets will remain small in the next one to three years and would not affect the overall market share of incumbent banks significantly.

Grab's special purpose acquisition company (SPAC) listing in the US is one example, said the agency. Even as Grab projects its financial-service transaction volume to grow at a compound annual growth rate of 44 per cent over 2020 to 2023, projected non-payment revenue in 2023 for Grab would be equivalent to about 3.5 per cent of the average revenue for the Republic's three large banks in 2020.

Nonetheless, Fitch highlighted that digital banks do have the potential to boost competition within Singapore's banking sector in the longer term. For example, should Grab's SPAC listing succeed, the company could add another US$4.5 billion to its cash buffers. This could provide it more financial flexibility to execute its digital bank growth strategy, among other expansion plans.

The extent to which competition in Singapore's bank scene changes will depend on "how well digital banks can execute their strategies", noted Fitch. Execution risks such as sustained profitability could be amplified if regulatory scrutiny of fintech players becomes more stringent.

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In addition, competitive dynamics will also see influence from DBS, UOB and OCBC as these entities step up their services to compete in the digital space.

"Fully digitalised processing of account opening and, in some cases, loan approval, is already becoming a norm," wrote Fitch, adding that banks have also increased their IT spending to compete with digital banks.

It highlighted that the banks' operating cost efficiency "compares well to some prominent foreign digital banks" which illustrates that they are well placed to compete with the digital banks from a cost-efficiency perspective.

As a result, Fitch noted that digital banks are increasingly looking for growth opportunities in emerging markets within the region such as Indonesia and the Philippines that host a "large unbanked and underserved sector".

"Both Grab and Sea have made investments in Indonesia that could provide a base for expanding their financial-service offerings in the country," wrote the credit ratings agency.