Fitch Ratings believes disclosures made by Singapore’s Grab Holdings as part of its planned US listing via a special-purpose acquisition company (SPAC) support our view that additional competition from digital rivals will have a modest near-term impact on the credit profiles of the three major Singaporean banks, DBS Group Holdings (AA-/Stable), Oversea-Chinese Banking Corporation (AA-/Stable), and United Overseas Bank (AA-/Stable).
A consortium between Grab and Singtel (A/Stable) was one of two successful applicants for Singapore’s digital full bank licences in December 2020, with the other being Sea. We expect incumbent banks to face some pressure on net interest margins as the new digital banks compete aggressively for deposits and loans when they commence operations, potentially in early 2022.
However, we anticipate that the digital banks’ balance sheets will remain small in the next one to three years, and not eat significantly into the incumbent banks’ overall market share.
Grab’s listing disclosures provide support to our assumptions. Grab projects its financial-service transaction volume to grow at a CAGR of 44% over 2020-2023, underscoring its ambition to ramp up expansion in this field. Nevertheless, even at this rapid pace of growth, projected non-payment revenue in 2023 would only be equivalent to about 3.5% of average revenue for Singapore’s three large banks in 2020.
Fitch acknowledges that Grab’s actual performance may deviate from its forecasts, depending on the evolution of the sector’s growth opportunities and competitive dynamics.
We still see potential for the digital banks to shake up the Singapore banking sector’s competitive landscape over the longer term. Grab and Sea look to have sufficient financial resources to meet the regulatory capital fund requirement of SGD1.5 billion (USD1.1 billion) for a full-digital bank.
Should the SPAC listing be successful, Grab could add another USD4.5 billion to its cash buffers, providing greater financial flexibility to execute its overall expansion plan, including its digital bank growth strategy.
The extent of any changes in the competitive landscape will depend on how well digital banks can execute their strategies. Execution risks, in particular surrounding their ability to become profitable on a sustained basis, will be considerable, and could be amplified if regulatory scrutiny of fintech players becomes more stringent, as we have observed in some other parts of the world.
Prolonged economic weakness could also weigh on the digital entrants’ growth prospects, especially if they are targeting higher-risk segments.
Competitive dynamics will also be influenced by the capacity of the three large Singaporean banks to compete in the digital space, where they are already enhancing their services. Their IT spending has increased, accounting for around 5%-7% of total operating income in 2020. Fully digitalised processing of account opening and, in some cases, loan approval, is already becoming a norm.
The banks’ operating cost efficiency, as measured by cost over average assets or cost to income, compares well to some prominent foreign digital banks, such as KakaoBank of Korea. This suggests that they are well equipped to compete against the new digital banks from a cost-efficiency perspective.
Partly for this reason, we see digital banks also seeking potential growth opportunities in other regional emerging markets, such as Indonesia and the Philippines, where there is still a large unbanked and underserved sector to tap.
This gives new digital entrants an easier path to critical mass. Digital banks in Singapore are allowed to operate in up to two other overseas markets even during their inception phase. Both Grab and Sea have made investments in Indonesia that could provide a base for expanding their financial-service offerings in the country.
