Covid-19 crisis may add US$300b to AsiaPac banks' credit costs

  • Banking
  • Monday, 06 Apr 2020

People wearing protective suits is seen at a street market in Wuhan, Hubei province, the epicentre of China's novel coronavirus disease (COVID-19) outbreak, April 6, 2020. RUETERS/Aly Song

KUALA LUMPUR: As the Covid-19 coronavirus ravages the global economy and puts millions of people under a lockdown, S&P Global Ratings estimates the economic storm will test the ratings resilience of the Asia-Pacific region's 20 banking sectors.

The ratings agency, which had recently cut its GDP forecast for the region, estimated an additional US$300bil spike in lenders' credit costs and a US$600bil increase in nonperforming assets (NPAs) will occur in 2020.

“S&P Global Ratings believes negative rating momentum is likely for some Asia-Pacific banks during 2020, ” according to a report published on Monday.

"The resilience of banks' asset quality in 2020 hinges in part on the success of governments' and regulators' policy responses. These measures are in early stages. Some have started, some are in planning, and we suspect many more may be in the wings," said S&P Global Ratings credit analyst Gavin Gunning.

Asia-Pacific governments, central banks, and supervisory authorities have rolled out diverse measures to address Covid-19.

These include liquidity injections, targeted loans to affected industries and regions, and policy rate cuts. It also includes support for banks to provide forbearance to otherwise economically viable households and businesses sideswiped by Covid-19. The equation underpinning policy responses is simple in theory but difficult in practice, and always comes at a significant fiscal cost.

"The principal risk we see beyond our base case for nonperforming assets and credit losses is that the coronavirus will spread faster, further, and for longer," said Gunning.

"This will deepen the economic pain we already anticipate for 2020. Financing conditions may likewise sour as investors become more risk averse. This would hit bank credit."

He pointed out while banks are not as exposed as the corporate sector during the initial stage of the pandemic, the strain on lenders could ultimately be profound.

Banks face a second-order hit compared with the corporate and household sectors. It's the snowballing effects on people movement (tourism, business travel, and education), supply chains, trade, and commodity prices that will eventually hit bank asset quality, and may disrupt bank credit ratings.

In absolute dollar terms, S&P Global Ratings expects China to account for the lion's share of these new NPAs and credit costs in Asia-Pacific. This is not surprising given the Chinese banking system dwarfs all other banking systems in Asia-Pacific.

“We expect the NPA ratio for the Chinese banking sector to increase by about 2.0% in 2020, and credit losses, to increase by about 100 basis points. The NPA ratio in India is likely to fare similarly to China's (1.9% vs 2.0%) but the credit costs ratios could be worse, increasing by about 130 basis points.

“Jurisdictions and subsectors within the Asia-Pacific financial institutions sector with less buffer at current rating levels may include those where:

“We saw weakness prior to the outbreak. This includes India, which already had a large overhang of problem loans before COVID-19 took hold.

“There are signs that market stresses will hurt banks. This includes Indonesia where the corporate sector has a greater reliance on U.S.-dollar borrowings, and which has high exposure to commodity prices, ” he said.

Another factor is that companies and nonbank financial institutions (NBFIs) are being inherently more vulnerable than banks.

The NBFI sector in Asia-Pacific (and other regions) is comprised of a large number of financially weaker players compared with the banking sector.

"Further, with governments in 14 of 20 Asia-Pacific countries supportive of systemically important banks in their jurisdictions, many Asia-Pacific banks are also vulnerable to a change in sentiment impacting Asia-Pacific sovereign ratings," Gunning added.

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