Higher interest rates challenge Asia-Pacific digital banks, says Fitch Ratings

KUALA LUMPUR (Sept 8): Many new digital banks in the Asia-Pacific region will find it more challenging to achieve financial viability as interest rates increase, economic growth slows, and funding conditions tighten, according to Fitch Ratings.

In a statement on Wednesday (Sept 7), it said a softer economy could also affect the banks’ target customers disproportionately, raising asset-quality risks.

The rating agency said it expects the current monetary policy tightening cycle to generally support bank credit profiles in Asia, to the extent that higher interest rates lift net interest margins (NIMs).

However, it said NIM improvements for digital entrants are likely to be constrained by their more limited pricing power, as they seek to boost their deposits and lending business to achieve scale and profitability.

Fitch expects NIMs for these entrants to be more influenced by their risk appetite.

“In general, we believe the best opportunities for digital banks in Asia-Pacific are in markets with larger unbanked populations.

“However, lending to underserved sectors carries higher risk, with their lower income and limited credit history posing key challenges for digital banks trying to crack the market.

“We expect credit costs to rise more significantly for these segments in a higher-interest-rate environment,” said Fitch.