KUALA LUMPUR: Moody's Investors Service expects Asia Pacific (Apac) banks' asset quality and profitability to be impacted if the outbreak of the coronavirus Covid-19 intensifies and the disruptions stemming from it are not contained in the next few months.
The rating agency said on Wednesday If the virus related disruptions are short-lived, there will be a limited credit impact on Apac economies and banks.
However, it also cautioned that the outbreak can also last for a prolonged period and become more severe.
Moody's said the sectors affected by the disruption caused by the Covid-19 are travel and toursim, private consumption, supply chains, commodities, property prices and financial markets.
Travel and tourism. As people travel less, economic growth and employment conditions will weaken in jurisdictions that are dependent on foreign travelers. This will hurt banks' asset quality, in turn driving up credit costs and weakening profitability.
Private consumption. Households will consume less at brick-and-mortar retail outlets, hurting businesses that are dependent on domestic private spending. Banks will face credit losses from exposures to weaker companies.
Supply chains. Factory closures in China will disrupt supply chains, particularly in the electronics and automotive sectors. In that event, credit risks for banks will arise from financing for suppliers or subcontractors that are dependent on orders from major technology or auto companies.
Commodities. Weaker demand from China can drive down commodity prices. In that scenario, economic growth in commodity-exporting countries can slow, with the financial health of commodity companies deteriorating, which will pose risks to banks' asset quality.
Property prices. Real estate prices can decline as a result of weaker economic growth and investor confidence, leading to larger losses on mortgages and property exposures.
Financial markets. Prices of financial assets are likely to decline if disruptions from the outbreak persists. This will result in declines in the values of mark-to-market securities held by banks and falls in revenue from financial markets.