Outlook stable, but headwinds rising for Asia-Pacific banks

The 2016 outlook for Asia-Pacific banks is stable, but asset quality and profitability will deteriorate for many of the region’s banking systems, according to Moody’s Investors Service.

Stephen Long, managing director for Moody’s Financial Institutions Group in the Asia-Pacific region, said this deterioration will be due to the group’s expectation of slower GDP growth in the region, potential further pressure on currencies and high levels of corporate and household debt in some countries.

“Bank ratings will remain broadly stable because of good capital levels, as well as strong funding and liquidity profiles since most systems are deposit funded, but the risk for ratings are skewed to the downside in the event of an economic slowdown in the region that is sharper than expected,” he said.

“We expect real GDP growth in [the] Asia-Pacific region of 4.5 per cent in 2016, unchanged from 2015, but below the 4.8 per cent recorded in 2014, mainly because of the slowdown in China.”

Moody’s said the operating environment is becoming more challenging in most Asia-Pacific banking systems because the banks feel the impact of subdued global growth, which is in turn worsened by weaker demand in China.

“As the credit cycle turns, corporate credit metrics will likely weaken, leading to higher corporate problem loans,” the credit ratings agency said.

“The share of debt owed by vulnerable companies is highest in India, Sri Lanka, Korea and China. Moreover, high household debt levels are a concern for banks in Thailand, Malaysia and Hong Kong, but growth has slowed owing to regulatory moves and tighter underwriting by banks.”

Despite the pressures on asset quality, Moody’s said the main reason most Asia-Pacific banks have stable outlooks is the strength of their loss-absorbing buffers.

“Profitability will likely weaken but remain sufficiently strong so that rising impairment expenses can be absorbed without resulting in weaker capitalisation,” it said. “A moderation in loan growth will also be supportive of relatively stable capital ratios.

“Another important buffer for Asian banks, beyond their profitability and capitalisation, is relatively strong loan loss reserves.”

Moody’s said there is likely to be some progress made in 2016 by Asia-Pacific regulators in closing the many gaps that exist in the region between current resolution regimes and the key attributes of effective resolution regimes as outlined by the Financial Stability Board.

“However, with the exception of Hong Kong, Moody’s does not expect to see the adoption of statutory regimes that would bail-in senior creditors as the most likely way that troubled banks would be resolved,” it said.

“Instead, Moody’s expects that government support will continue to be an important supporting factor in the credit profile of most rated banks in the region.”

[Related: Deloitte gives regulatory outlook for 2016]

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