FIRST SHAREHOLDERS BUOY HONG KONG VIRTUAL BANKS FROM FAILURE RETAIL BANKING
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ontinuous shareholder support should help Hong Kong’s virtual banks weather initial losses in the path to growing their business. Six out of eight virtual banks in Hong Kong reported narrower losses in 2022 amidst a moderation in operating cost growth and expansion in higheryielding lending, the ratings agency, Fitch Ratings noted in a report. However, as they stand, the nascent banks remain vulnerable to higher failure risks than traditional banks due to a limited record in terms of customer loyalty, economies of scale, and risk management. “Virtual banks are more reliant on costlier deposits than traditional peers due to their nascent franchises,” Fitch said in a report. “These higher funding costs drive virtual banks’ risk appetite, evident from their lending to higher-risk segments, such as SMEs and unsecured borrowers, and investing in higheryielding corporate debt securities.” Investment securities and corporate debt accounted for 36% of virtual banks’ total assets on average as of end-2022. Loans endangering neobanks Neobanks’ loans to higher-risk borrowers expose them to potentially higher credit costs in an economic downturn. This also renders them more susceptible to potential market confidence issues in the event of stress, especially since their depositor loyalty is unproven and easy transfers make the deposit base vulnerable to flight risk, Fitch warned. The shareholders of these virtual banks are key for virtual banks as they establish their foothold in the industry. As most of these shareholders are established corporates or incumbent banks themselves, they provide the necessary capital and funding support to help virtual banks weather initial losses and support their growth momentum. 6 ASIAN BANKING & FINANCE | Q3 2023
Philippine banks reportedly devote only less than 10% of their revenues to IT. In comparison, on average, incumbent banks across APAC invest about 15% of their revenue. In line with this, digital channels of Philippine banks’ account for just 5% to 15% of their revenue-below the average of 25% for their peers in Asian emerging markets. Local fintechs, meanwhile, focus almost exclusively on payments. Infrastructure constraints further limit their reach, the analysts noted. “The result is a widening gap between the country’s enormous underbanked population and the expanding range of innovative financial technologies lying just beyond its borders,” they warned. Corporations receive 76% of all loans extended in the Philippines. In contrast, small and medium enterprises or SMEs continue to face binding credit constraints. This is a problem for a country with over 15 million informal entrepreneurs Traditional banks have been slow to reach new customers outside and self-employed workers—a massive their existing client base (Photo by Patrick Quisil from Pexels) pool of would-be borrowers who have little access to traditional finance. Retail lending also remains focused on a narrow band of wealthy households, McKinsey noted. “This unbalanced distribution of LENDING & CREDIT existing loans—combined with a rapidly growing adult population, he Philippines has been continuous broad-based gains in identified as one of the household income, ongoing regulatory world’s largest greenfield efforts to promote financial inclusion, markets for digital financial and the introduction of new digital services— but local banks are not technologies—makes retail lending rising up to attain its true potential. especially prone to disruption and Banking penetration rate remains accelerated growth,” the report said. among the lowest in the region. Guillaume de Gantès Domestic banks have also Traditional financial institutions traditionally ignored remittances, focus heavily on commercial lending, which mobile payment players such leaving a rapidly growing, increasingly as GCash and Maya are now explicitly affluent, and digitally savvy potential targeting. It’s easy to see why these customer base with little access to e-wallets have set their sights on this: financial services that meet their each year, on average, about $30.5b in needs, consulting firm McKinsey & remittances-or 10% of the country’s Company said in a report. GDP-flows into the Philippines “Traditional banks remain focused Kristine Romano through wire-transfer services and on wholesale banking and have been traditional interbank networks. slow to reach new customers outside Despite this massive market, their existing client base. Rural traditional banks have not areas are home to nearly half the systematically incorporated remittance population, yet rural households are income into their lending decisions, especially underserved, and many McKinsey noted. have little or no access to brick-and“Remittances play an especially mortar banking infrastructure,” wrote Remittances play vital economic role in rural areas, McKinsey senior partner Guillaume an especially where households are least likely to de Gantès; associate partner Hernan Gerson; and Manila partner Kristine vital economic role have access to bank accounts, credit in rural areas Romano in the report. histories, and collateral.
PH banks snub growing middle class market
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