Singapore lenders risk 3-5% asset base erosion from digibank entry: Jefferies

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 accessing client risk profile, in the event that existing customers divert part of their business to new entrants 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.

Unsecured lending - a fairly well-regulated business where local banks dominate - is an avenue for Singapore's new digital banks to generate profit, said Mr Guha, who noted that the incumbents are likely to face competition for deposits and interest rates that banks and non-bank financial institutions currently charge for unsecured lending.

"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," he said.

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