Established, digitally advanced incumbent banks will gain from the trend as customers flock to convenience and perceived safety in times of crisis, while also reaping the benefits from potentially improved productivity as well as cost savings from closed branches in the medium term.
This was the assessment of Fitch Ratings, adding that many major banks across the region have reported a surge in online banking activities since the onset of the pandemic.
For example, Bank Rakyat Indonesia (Persero) Tbk (BBB-/Stable) reported around 88% year-on-year growth in internet banking activity in 1Q20, and a similar trend occurred in many major banks in the Philippines and Malaysia.
The three large Singapore banks, in addition to higher digital transactions, have also reported a significant rise in digital account opening or usage of 'robo-advisory' financial planning services platforms in the same period.
Fitch expects this trend to persist even after the outbreak subsides, as customers who were used to cash-based and over-the-counter transactions maintain their newly adopted habits. This, coupled with the greater adoption of open banking architectures in some jurisdictions, would force banks to innovate more quickly or risk falling behind.
The ratings agency also expects the smaller banks, especially those with below-par digital capabilities, to be more at risk of the change in competitive dynamics.
Fitch believes that banks will be even more active in pursuing growth through digital channels, with existing branches likely to be further optimised towards higher value-add, cross-selling services. Except for the Philippine, banks in the region had not generally been relying on the expansion of physical distribution channels to drive revenue before the pandemic.
Fitch estimates that the banks in major ASEAN markets have on average been expanding revenue at a 8% CAGR over 2014-2019 while their branch networks have been shrinking by 1% CAGR.
The shift towards a digital-channel strategy is likely to be significantly amplified now that customer preferences are abruptly adjusted. DBS Bank Ltd. (AA-/Rating Watch Negative) has in the past reported that the cost-to-income ratio of its digital customers is roughly 20pp lower than its non-digital banking clients, implying considerable potential productivity to be gained in the longer term should the trend persists.
Actual investments in IT are likely to be tempered in the near term as banks look to cut overall costs in the face of significant business uncertainty.
According to Fitch, the significantly higher adoption rate of digital banking is likely to help more of the well-established, digitally advanced banks to widen their competitive advantage further against the less agile players as well as the incoming digital-only banks in the medium term.
Regulators around the region have already extended the deadline for awarding virtual bank licences as a result of the pandemic, which it expects to also weed out weaker, aspiring online banks from competing for the licences. More established challengers, especially those that come from a non-traditional banking background, will be likely to reassess their digital bank strategy or focus their time on managing their existing businesses.
Many virtual-bank licence contenders have identified the underserved and unbanked population as a potential source of growth, and Fitch believes that such potential remains intact - especially in emerging markets around the region.
The agency says that these segments are likely to be the most vulnerable in the face of severe stress in the economy. This may further compel the aspiring digital-only lenders to re-think their entrance approach and be more specific in their client targeting as they balance risk and reward. It also expects incumbent banks to be generally more selective in their client selection in the current environment.
It does not expect the acceleration in the digitalisation rate to have a significant impact on banks' ratings in the near term. It opines that the significantly weaker operating environment - not improvement or deterioration in franchises - will have a more pronounced and immediate impact on the financials in the foreseeable future.
“We may see rating implications in the longer term, but this would depend on whether their augmented, or weaker, overall franchises lead to significant and sustainable improvement or weakening in the banks' financial performance as the economic condition normalises,” concluded Fitch.
