Fitch: Brighter Outlook for APAC Banks, Risks Remain

Fitch Ratings' outlook for bank performance in Asia-Pacific (APAC) is decidedly less negative than at the start of 2017, with the improved economic backdrop likely to support loan demand and asset quality. The benign environment has the potential to mask weakening lending standards in markets where credit is growing particularly strongly, but any fallout is unlikely to be significant in 2018.

APAC is generally benefitting from the global upturn in trade and growth. Many of Asia's emerging markets have ambitious infrastructure development plans that should boost employment and domestic demand, while fiscal policy is turning more expansionary in some developed markets. We expect profitability to remain relatively stable in this benign environment, supported by sound lending growth, fee-income diversity and a drop in asset-quality pressures, particularly from the resources sector following the stabilisation of commodity prices. Offsetting pressures are likely to come from competition, higher funding costs and implementation of IFRS 9. Costs to enhance operational efficiencies could also feed through, such as investment in technology.

 

It is too soon to assess if lending standards have held up in markets where there has been sustained high credit growth, but banks have been taking incrementally greater risk in some segments - such as SMEs and consumer lending, and through expansion offshore - as they try to overcome competitive pressures. Meanwhile, high and rising property prices remain a common theme across most of APAC's developed economies, as well as some emerging economies such as China, Malaysia, the Philippines and Vietnam.

That said, a significant deterioration in asset quality is unlikely in 2018, given the prevailing economic conditions. We also believe that regulators have remained focused on containing risks, especially where concentrations exist. In the property sector, for example, regulators have taken steps to address potential vulnerabilities. A continued tight regulatory stance should also help protect banks against spillover effects from potential property price shocks, which is particularly relevant for Hong Kong, Australia and New Zealand, while in some countries - Singapore and Taiwan - it has already helped to cool the market.

The prospect of interest rates rising further in the US could have negative implications for banks in markets with higher leverage, more volatile exchange rates, or with higher exposure to fixed-income securities. Rising rates often support interest margins as deposits re-price more slowly than lending rates, but risks can also stem from higher debt-servicing burdens, softer equity or property market sentiment, or a reduction in domestic liquidity. Japanese banks face less pressure as a result of the Bank of Japan's reduced emphasis on the negative-interest-rate policy.

Banks in most APAC markets generally have capital ratios that provide adequate buffers against risks, although there are some exceptions. It is unclear if the injection of USD32 billion into India's state banks will be sufficient to deal completely with asset-quality issues and support a ramp-up in lending. Chinese mid-tier banks are facing capitalisation pressures from asset-quality issues and strong on-balance-sheet credit growth.

The implementation of IFRS 9 in most markets in 2018 could lead to a modest decline in regulatory capital ratios and an increase in provisioning. However, our surveys suggest the initial financial impact is unlikely to be significant, and it could be potentially offset by releasing higher regulatory allowances for expected losses in some markets.

Powered by Capital Market - Live News