Fitch Ratings says Asean's close trade and financial linkages with China pose another potential risk to the banks.
KUALA LUMPUR: Indonesia, Malaysia and Thailand are thee out of the six Asean country banking sectors which are on Fitch Ratings's negative sector outlooks due to the challenging operating environment and high risks.
The international ratings agency said on Thursday that Singapore is on a stable sector outlook, but downside risks have also risen there over the past year.
“Indonesia and Malaysia have been the Asean economies most exposed to the negative effects of lower commodity prices. Both economies have recovered from the terms-of-trade shock, but are still growing at a slower rate than before the commodity price crash.
“In Thailand, GDP growth has been held back by rapid population ageing and declining export competitiveness. Prolonged economic weakness in any of these economies could cause a reassessment of our bank ratings,” it said.
Fitch said nevertheless, the major banks in all of these economies look resilient and remain on a stable rating outlook, owing to satisfactory profitability and strong loss-absorption capacity.
However, it pointed out that buffers are much thinner in Vietnam, where banks have the lowest ratings among those it has assessed in Asean.
Fitch said Vietnam's banks are saddled with legacy problem assets and also face structural problems. The economy has been performing strongly over the past two years, which partly explains our revision of the sector outlook from negative to stable in late 2015.
“But poor transparency and regulatory forbearance makes it difficult to ascertain the true balance-sheet strength of Vietnamese banks. We nonetheless believe that their ratings in the single 'B' range reflect those risks,” it said.
To recap, Fitch noted that the operating environment for banks across much of Asean has become more challenging over the last couple of years.
It highlighted that the region's banks also face risks stemming from a sharp rise in debt during the last decade, and are relatively exposed to developments in China.
However, in most countries banks have adequate loss-absorption buffers that should support their ratings, says Fitch Ratings.
“Real GDP growth is higher in all six Fitch-rated Asean countries than their rating peer medians, but slower global GDP growth, weak world trade, currency depreciation and the drop in commodity prices have contributed to deterioration in the operating environment for many of the banks over the last couple of years, and asset quality has deteriorated,” it said.
Nonetheless, Fitch expects the non-performing loans (NPL) ratios - low by historical standards - to rise in 2016 and beyond in most of the banking sectors that Fitch assesses in south-east Asia.
However, the weaker operating environment could potentially expose vulnerabilities created in Asean's banking systems during the years of rapid credit growth that followed the 2008 global financial crisis.
“Credit growth has slowed in most countries over the past two years, although credit/GDP ratios are generally much higher than a decade ago. Household debt has risen particularly strongly in Malaysia, Thailand and Singapore.
“These risks have been manageable, but could become a source of larger asset-quality problems with a rise in unemployment or interest rates,” it said, adding that it expects the US Federal Reserve to hike rates again by year-end, which could close the window for further easing.
Also another point is Asean's close trade and financial linkages with China pose another potential risk to the banks.
While Fitch does not expect a hard landing in China's economy, although the heavy reliance on credit expansion to meet GDP growth targets is adding to medium-term vulnerabilities.
