SEA banks' more crypto exposure could hit earnings in the long run: Fitch

Banks looking to dab in crypto face operational, reputational, and legal risks.

The interest of banks in Southeast Asia (SEA) to develop cryptocurrency financial services are unlikely to affect their credit profiles in the near term, according to a report by Fitch Ratings, but earnings opportunities and risks could grow over time depending on developments in their markets, particularly regulation-wise.

Fitch believes that more banks in SEA will establish a foothold in the crypto sector in 2022. These banks will likely try to curb risks through a series of measures, such as limiting access to accredited institutional investors, dealing only in better-established digital assets, and clearly segregating custodian accounts from trading wallets. 

Recently, the UnionBank of the Philippines reportedly planned to offer trading and custodial services for cryptocurrencies, according to recent media reports. 

Other banks have begun dabbing with cryptocurrency outside their main banking businesses. Singapore’s DBS has, for example, established a wholly-owned cryptocurrency digital exchange platform. Meanwhile, Thailand’s Siam Commercial Bank, through its SCB Securities unit, has acquired a 51% stake in a Thai cryptocurrency trader, BitKub, in November 2021.

Crypto trading and custodial fees can boost and diversify income, according to Fitch.

“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,” Fitch wrote in the report.

However, regulators’ growing antagonism against cryptocurrencies and crypto-focused entities is developing quickly and may raise costs.

“Changes could raise compliance costs or curb existing or planned business activity, even as tighter regulation helps to contain financial and operating risks, providing greater assurance to potential crypto investors and users,” Fitch said. 

Crypto engagement may also expose banks to more legal risks, such as money laundering and terrorism financing. 

Banks’ reputations are also at stake should they offer crypto services, even from activity that is legal, warned Fitch. For example, if customers perceive banks have tacitly endorsed crypto trades that subsequently turn sour, this could impact lenders’ reputations.

Banks also face operation risks once they get into the crypto sector.

“The sector’s nascent nature means few crypto firms have developed a track record of stability for their systems and platforms. We view cybersecurity threats, such as scams and hacks involving exchanges, as another prominent risk,” Fitch wrote.

The rating agency also warned of possible issues around ESG exposures, given the energy-intensive nature of some cryptocurrency mining and verification operations.

Another risk to consider is the volatility of cryptocurrencies, which could be seen by the steep rise and fall of many cryptos’ market values. This could lead to a growth in the earnings instability of bank revenues, said Fitch.