S&P sees digital disruption of bank credit ratings after 2021

S&P Global Ratings believes that the neobank boom sweeping across the Asia Pacific region is not likely to trigger any changes in banking sector country risks before the middle of 2021.

In a special report on the rise of virtual banks published on Wednesday, S&P argues indigenous and global digital banks are intensifying competition in the banking industry and will eventually magnify ratings differentiation between banking systems and banks across the region.

"To date, this development has not caused any noteworthy changes to our outlooks for banking sector country risks across the region," the ratings agency said in the report.

"Our current base case is that virtual banking may not lead to rating or outlook changes for Asia Pacific banks over the next two years.

"Over a longer time horizon, however, as virtual banking strategies take hold and further disrupt the traditional bank sector, the potential for ratings differentiation is greater."

S&P has observed "significant variability" in the evolution of  the regulatory landscape for virtual banks in the region.

Regulators in Hong Kong, Singapore, China and Australia have already awarded licences to standalone digital banks; however the development of virtual banking appears to be lagging in Taiwan, Japan and Malaysia.

S&P argues in the report that traditional banks with large, well-established client bases and greater resources, are better prepared to take on competition from digital players compared to small and midsize ADIs.

"We expect smaller banks to rely on collaboration with tech companies to rise up the digital learning curve," S&P said in the report.

The launch last year of the UP banking joint venture between Bendigo and Adelaide Bank and Melbourne-based tech firm Ferocia Pty Ltd is the main local example supporting the S&P thesis.

However, the ratings agency's report appears to overlook the profound legacy technology challenges that confront Australia's four major banks over the next five years.

At various times in the last year Australian regulators, particularly APRA and the Reserve Bank, have urged the four major banks to begin developing plans to overhaul their outdated and inefficient core banking platforms.

Overseas experience indicates that the major banks' large customer bases loom as risk factors likely to increase the operational hazards and costs of material technology transformations.