ASEAN digital banks are benefiting from rapid expansion in the region, with strong customer growth and rising asset quality. However, Moody’s Investors Service is concerned about their profitability and credit risk.
According to Moody’s Investors Service, most digital banks in Southeast Asia operate under a business model that has yet to be tested across credit cycles, and the profitability of underwriting the unbanked and underserved sector is unknown.
Digital banks in Indonesia and the Philippines, in particular, have started to gain traction, but the financials so far suggest that most banks have yet to expand their loan portfolios sufficiently to turn a profit. The rating agency added that most of these banks are still in the early stage of development, which will require time to build sustainable underwriting models.
Moody’s further notes potential volatility in financial support from technology companies, which have been key backers of many such banks in the region. Technology companies are not regulated financial institutions and can provide short-term liquidity to their investee banks as they see fit.
Outside of Southeast Asia, McKinsey highlighted that digital banking in Asian countries such as China, South Korea, and Taiwan are backed by well-established tech companies.
“To earn the right to compete, [digital banking license] applicants must show that they offer an outstanding proposition and have the strategic, operational, and financial resources to operate in one of the world’s most dynamic banking environments,” analysts from the consulting firm said.
In October last year, Indonesia launched its digital banking blueprint to increase financial inclusion in the country. The blueprint, which is supported by the government, aims to increase the resilience and competitiveness of the country’s banking industry.
Following the launch of the blueprint, Ajaib invested $52 million in Bank Bumi Arta, an up-and-coming digital bank that aims to compete with the likes of Bank Jago, Bank Seabank, and Bank Neo Commerce.
Similarly, the Philippines has been pushing for a cashless society, with the Bangko Sentral ng Pilipinas (BSP) issuing digital banking licenses to six companies so far. BSP has also issued a moratorium on additional licenses, so it could monitor the performance of the first batch of digital banks.
Other countries in the region are accepting digital banks folded under established financial institutions (Vietnam), preparing their license application or banking policies (Malaysia and Thailand), or reviewing submitted license applications (Singapore).