Fitch Ratings said most Asia-Pacific digital banks face higher credit risks than incumbent rivals due to their focus on underserved or unbanked market segments.
It said, however, the ratings of digital banks within Fitch’s portfolio are generally driven by expectation of extraordinary support from their shareholders rather than their standalone credit profiles.
Digital banks tend to charge higher loan interest rates to compensate for higher default rates, but it has still been challenging to manage credit risk while growing loan books and targeting underserved segments, in particular in some countries with low household incomes, Fitch said.
This has been highlighted by a recent spike in credit costs at some digital lenders against the backdrop of relatively high interest rates in countries like Indonesia, the Philippines and Hong Kong.
At least 16 of the more than 45 digital banks in the region have achieved breakeven, including six in Japan where such banks tend to be more risk averse and have a longer record of profitability.
“We believe the banks’ reliance on digitally savvy customers and more price-sensitive deposits increases their vulnerability to deposit outflows and liquidity stress, but for now such risks can be mitigated by parental support,” Fitch said.
