Singapore's banks face significant competition for 3 per cent to 5 per cent of their asset base from digital-only entrants, said investment bank Jefferies yesterday.
It also warned that the competition cannot be underestimated because the key advantage of technology firms, as well as others that also offer financial services, is that they "get almost a real-time 360-degree view of their customers".
Jefferies equity analyst Krishna Guha noted that a key long-term threat for local banks would be the loss of extra information in assessing risk profiles if existing customers divert part of their business to new entrants.
Expanding in other geographies will also be easier for the digital-only entrants, as tech-enabled financial services are not hindered by the pace of branch roll-outs. That would force Singapore's local banks to compete on the same terms in geographies where financial services penetration is low.
Unsecured lending - a fairly well-regulated business where local banks dominate - is an avenue for Singapore's new digital banks to generate profit, noted Mr Guha.
Incumbents are also likely to face competition for deposits, assuming that new entrants offer 3 per cent on a six-month deposit when current comparable deposit rates are about 1.5 per cent, he said.
But as things stand now, he does not see a major threat to incumbents. "In any case, unsecured book (excluding credit card) by our estimate is about $50 billion. So that may see asset yield compression, but then the three local banks have about $1.5 trillion of assets of which half originate within Singapore.
"So, at best, the incumbents face significant competition for 3 per cent to 5 per cent of asset base.
"In our view, the three local banks have steadily invested in digitalisation. This should augur well for them in facing new competition."
THE BUSINESS TIMES