Do online-based banks represent a threat or an opportunity for traditional banking players?
Led by government policy aimed towards fostering the domestic fintech industry and permitting the establishment of online-based banks, traditional banking players’ shares have been sapped as of late by concerns towards their future profitability. But, noting that the competitiveness of online-based banks has yet to be verified, we do not view pure online banks as posing a significant threat to offline players. Moreover, online banks and traditional banks should be competing in relatively separate arenas.
Competitiveness of online-based bank yet to be verified
- When comparing the US and Japan’s online-based banks with their top-five traditional banks, it is difficult to observe a clear difference between loan loss provisions to total asset ratios. Thus, it is our opinion that there will be pressure on online-based banks to prove that they can actually achieve lower credit cost ratios (than those for offline-based banks) by using a high-tech credit analysis algorithm based on big data.
- Upon a comparison of SG&A expenses in the US and Japan, the figures for online-based banks only slightly better than those for traditional banks. Thanks to their low-cost structures (no expenses incurred for offline branches), online-based banks have the advantage of being able to offer competitive interest rates. However, their interest rates should be comparable to both: 1) direct deposit rates (ie, the rates for offline-based banks (such as KDB and JB)’s online deposit products); and 2) the average rate for new loans.
Pure online-based banks do not pose notable threat to traditional players
- As returns on mortgage loans are already overly low, it will be difficult for online-based banks specializing in housing mortgage loans to be competitive.
- Meanwhile, online-based banks specializing in SME loans should be able to secure a certain level of profitability. But, as SME-related credit risks will likely largely hinge upon long-term qualitative information and risk-management acumen￢, we believe that it will be tough for online-based banks to gain a competitive edge for now.
- In addition, it is daunting for online banks to specialize in loans to large corporations due to: 1) low profitability (in general, banks record low margins for their loans to large firms); 2) the difficulties entailed in diversifying their loan portfolios; and 3) the potential of being critically impacted by the insolvency of a single large-scale loan.
- But, online-based banks will likely be well situated to specialize in small-scale household credit loans. Assuming that their credit cost ratios are well managed, such online-based banks should be able to achieve a certain level of related profitability. However, this factor is unlikely to constitute a notable concern for traditional players (which have relatively small exposure to household credit loans).
Online bank impact to be neutral, but watch sector over mid- to long term
- It is uncertain if online-based banks will create a ‘blue ocean’ (uncontested market) in the loan market (which, affected by fierce competition amid lackluster growth and low interest rates, is currently a ‘red ocean’).
- Even if the presence of online banks becomes more prominent, we believe that major commercial banks, regional banks, and IBK will all maintain their competitive edges. In detail, we point out that: 1) major commercial banks such as SFG and KBFG enjoy superior cross-selling platforms (based on the healthy diversification of their business arms); 2) focusing on local SME loans, regional banks boast loyal customer base; and 3) IBK should retain its competitive edge in serving the needs of SMEs.
*Source: Woori Investment & Securities Co.