Credit losses set to decline for most Asia Pacific banks, says S&P

Credit losses are set to fall across most Asia Pacific banking systems over the next two years, S & P Global Ratings said on Tuesday.

This is partly because targeted assistance to stretched borrowers will likely continue in many places until pandemic-related challenges substantially abate.

"Asia Pacific banks should safely avoid a 'cliff effect' even as extensive relief measures are progressively removed," said S & P Global Ratings credit analyst Sharad Jain.

Moratoriums on loan repayments -- together with fiscal, monetary and policy support -- have helped cushion the blow to borrowers in Asia Pacific from the Covid-19 outbreak and containment measures.

 

Repayment moratoriums have fallen to less than 5 per cent of system loans for a number of Asia Pacific countries compared with between 6 and 80 per cent at the height of pandemic.

S & P forecast credit losses for the 12 larger banking systems in Asia-Pacific: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand.

"We forecast that credit losses will remain well below our expected long-term average in most countries despite last year's economic hardship," said Jain.

Credit losses encompass provisioning for expected bad loans and generally precede charge-offs, the actual write-down of loans that detract from the balance sheet allowances for credit losses.

S & P said most banking systems will see problem loans elevated over the next few years as delayed hits from the pandemic take time to normalise. However, sturdy provisioning thus far combined with economic rebounds and strong government support will contain credit losses.

In addition, the stress on the region's banking asset was at historical low levels just before the pandemic struck.

In India and Indonesia where banks have suffered higher asset distress in recent years, credit losses are set to trend closer to expected long-term average in the coming years, said S & P.

While China's banks has taken much of its pandemic-related pain up front, with large credit losses reported in 2020, the fallout is not quite over. Given the vast size of the country's banking system, this translates into big numbers.

In absolute terms, credit losses for Asia Pacific could reach 585 billion dollars by 2022, or nearly double the pre-Covid level, and this is driven by China. S & P said the effect of Covid-19 on credit costs in the country will be extended over several years.

Given the scale of the supports to banks and borrowers, downside risks will stay elevated. Besides moratoriums and fiscal support, temporary lenient regulatory and accounting treatment of stressed borrowers will also be lifted over time. And new waves of Covid-19 remain a threat.