HONG KONG
Moves by a number of banks in south-east Asia to develop capabilities in cryptocurrency financial services are unlikely to affect credit profiles substantially in the near term, as many have adopted a cautious approach, says Fitch Ratings.
Earnings opportunities and potential reputational, operational and even financial risks could grow over time, depending on the evolution of the sector and their engagement with it, said Fitch Ratings on Friday.
It said that Bloomberg reported on January 20, 2022 that Union Bank of the Philippines planned to offer trading and custodial services for cryptocurrencies. Others in the region are also becoming more active in crypto. Singapore’s DBS has, for example, established a wholly owned cryptocurrency Digital Exchange platform. Thailand’s Siam Commercial Bank also acquired a 51% stake in a Thai cryptocurrency trader, BitKub, in November 2021 through its SCB Securities unit.
“We believe more banks in south-east Asia will establish a foothold in the crypto sector in 2022,” said Fitch, adding some may curb risks through measures, such as limiting access to accredited institutional investors, dealing only in better-established digital assets and clearly segregating custodian accounts from trading wallets. Greater participation will also hinge on regulatory postures: the authorities in markets such as Singapore and Indonesia have increased scrutiny of banks’ crypto engagement.
Crypto trading and custodial fees can boost and diversify income, although revenues are unlikely to be significant in the next few years for rated banks in south-east Asia, in Fitch’s view. Banks may be able to develop competitive advantages in emerging financial service fields or engage with new customer segments, depending on their risk appetite.
They may also be able to protect their market positions against competitive threats posed by crypto-focused entities and technologies in segments, such as wholesale clearing and settlement, and cross-border payments, said the rating agency.
Operational risks are also significant for entities in the crypto sector. The volatility of cryptocurrencies, highlighted by the steep drop in the market value of many cryptocurrencies in recent weeks, could add to earnings instability if bank revenues from the sector grow in the longer run, though it is also possible volatility may ease over time.
“We believe recent crypto activity is unlikely to have major near-term rating repercussions for Fitch-rated banks in south-east Asia, but continue to assess developments as they arise. Our understanding of controls and compliance procedures to mitigate risk, such as know-your-customer (KYC) processes, will be an important ratings consideration for banks developing digital asset capabilities,” said Fitch.
In the longer run, the punitive regulatory capital requirements recommended for crypto assets held on bank balance sheets by the Basel Committee on Banking Supervision should limit direct exposures. However, if these increase they could pose challenges to banks’ creditworthiness, said the rating agency.
