KUALA LUMPUR (Oct 8): The proliferation of digital banks in Southeast Asia will intensify competition in the banking sector, said Fitch Ratings.

In a report titled "Potential Disruption from ASEAN Digital Banks" released on Thursday, the rating agency said the near-term rating impact is likely to be modest for existing rated banks in the region, especially for larger incumbents that invested heavily in digitalisation in recent years.

It said most digital banks in Southeast Asia only recently started or are about to commence operations.

Fitch expects many of them to be able to grow their customer bases quickly, thanks to the strong reach of their parents' ecosystems and their well-resourced backers, in particular those with large incumbent banks and established regional tech players as supporters.

It said it expects funding competition to intensify as digital banks aggressively build their deposit bases, leaving incumbents with weaker deposit franchises facing more competition.

Fitch said many digital banks in the region will adopt an asset-heavy business model, with loans acting as a core recurring revenue generator.

It explained that the retail and small and medium enterprise (SME) segments are likely to be the most vulnerable to heightened competition, but digital banks are likely to first focus on the low-hanging underserved segments.

Therefore, it said customers that are near the fringes of incumbent banks' credit risk acceptance criteria are most prone to being poached by new entrants.

Fitch said near-term financial ramifications from the competition posed by digital banks are likely to be modest for large rated banks in the region.

It said this takes into account their entrenched franchises, well-established customer relationships and capacity to invest in their own digital offerings and adapt to such competition.