S&P Global Ratings has reported that digital banks are facing significant challenges in turning a profit due to bad loans and high operating costs. This is in contrast to the overall positive outlook for the local banking sector, which is expected to benefit from a strong economic growth this year.

According to S&P, digital banks are struggling with weak asset quality and high costs, leading to continued losses. The Bangko Sentral ng Pilipinas (BSP) has also expressed concerns about the performance of digital banks, although it has acknowledged their success in attracting deposits online.

The BSP has granted digital banking licenses to six players, but S&P’s data shows that these banks have a high exposure to unsecured consumer loans and a largely untested credit profile for their target customers. As a result, 20% of their credit portfolio has turned sour, compared to the 3.4% industry average.

To mitigate the impact of these bad loans, digital banks are setting aside a significant amount of their capital, which is affecting their ability to lend. Additionally, their operating costs are high due to their narrow revenue base and nascent operations.

In light of these challenges, the BSP has imposed a three-year moratorium on new digital banking licenses to closely monitor their performance and impact on the financial system. The central bank is expected to release an industry report in the first quarter of the year.

Overall, S&P’s outlook for digital banks is pessimistic, while its outlook for the local banking sector is positive. This highlights the stark contrast between the two and the challenges that digital banks are facing in the current market.  

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