Standard & Poor’s Global (S&P) has projected a difficult year ahead for Asia-Pacific financial institutions, in light of potentially enervating financial conditions throughout the region.
A recent report released by S&P, Asia-Pacific Financial Institutions Monitor 1Q 2019: A More Difficult Year Ahead, predicts that Australian banks and APAC’s spectrum of financial institutions may face numerous risks and challenges in 2019.
The report reads: “Australian banks remain vulnerable to a large and rapid fall in property prices, amid high private-sector debt and potential for tightening in global interest rates. A sharp correction, if accompanied by broader macroeconomic weakening, would very likely hurt the banks.”
However, a positive outlook across the Asia-Pacific banking sector could increase, according to the report, “should there be an amelioration of our concerns regarding a potential diminution of government support for systemically important Australian banks.”
“This scenario could occur if the outlooks on the Australian major banks and their subsidiaries – which are currently negative – were to be revised to stable with current ratings affirmed,” it reads.
The report went on to outline that increased certainty around the Australian Prudential Regulation Authority’s proposal to augment the loss-absorbing capacity of Australian banks is crucial for the direction of S&P’s ratings on Australia’s financial institutions.
S&P’s warnings for Australian banks were threaded with a silver lining or two, with the report reading: “At the same time, based on our forecast for continued good economic growth, immigration-driven population growth, low unemployment and low interest rates, we consider that a disorderly fall in property prices remains unlikely.”
“Nevertheless, any signals indicating a trend towards significant weakening in household, business, and investor confidence, which – amid a property price correction – could be a precursor to economic and financial system distress.”
The report highlights falling housing prices in Sydney and Melbourne over the last 12 months, which, alongside low loan arrears and credit losses, may signal “an orderly unwinding of imbalances” occurring in Australia. S&P expects this trend will continue in 2019.
Regarding APAC financial institutions at large, credit analyst at S&P Gavin Gunning commented: “High debt levels and lofty asset prices have evolved during what has been an extraordinarily long economic and credit cycle across much of Asia Pacific. These elevated risks set the scene for a potential deterioration in Asia-Pacific bank credit quality, over the short to medium term.”
According to the report, financial conditions in Asia-Pacific are likely to weaken in 2019 due to volatility across domestic currencies, bond markets and property markets – alongside forecast interest rate hikes across numerous nations.
Despite worsening credit conditions predicted for 2019, S&P reported Asia-Pacific bank ratings are likely to remain stable, following a similar trajectory seen over the last 12 months.
Nevertheless, Mr Gunning noted red flags for Asia-Pacific financial institutions, adding: “A significant and abrupt credit cycle downturn would likely result in negative ratings momentum for some Asia-Pacific banks.
“This is despite our expectation that most banks can contend with a moderate and gradual negative turn in the credit cycle at current rating levels.”
Meanwhile, the report added: “The economic risk trend of 85 per cent of our 20 Banking Industry Country Risk Assessments (BICRAs) in Asia Pacific and the industry risk trend of 90 per cent of BICRAs are currently on stable outlook.”
This is particularly true for Australia and New Zealand, according to the report, as economic risk trends are positive and “driven by lessening concerns regarding economic imbalances”.
At the same time, fintech, in all its diversity through Asia Pacific, continues to expand and transform. Relative to the financial institutions monitor, the report stated: “To date, fintech has not caused us to adjust any bank ratings, although there is the potential this could occur.”
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