Outlook for Asia-Pacific banks stable, says Moody's Investors Service

KUALA LUMPUR: The outlook for the Asia-Pacific (APAC) banking sector is stable, underpinned by relatively stable economic conditions, high loss buffers and improving profitability, said Moody’s Investors Service.

The research firm said economic outlook remains supportive of banks’ growth and credit worthiness, even while moderating.

"Real Gross Domestic Product (GDP) growth for many APAC markets will moderate but remains healthy. Tight labour market conditions in advanced Asian markets will buffer the impact of high inflation and rising interest rates,” it said in a note today.

Moody’s said the global economic slowdown will present challenges for markets that are more heavily reliant on trade and exports such as Bangladesh and Mongolia, as well as tourism, such as Thailand.

On the other hand, it noted the slowdown of China’s growth would most directly impact banks in Hong Kong, China and Taiwan. Through other channels, it will have an indirect impact on banks in Australia, Indonesia, Mongolia, New Zealand and Thailand.

The research house also shared that asset risks will rise but credit costs will increase only modestly as banks maintain high loss absorbing buffers.

"Easing economic growth, higher interest rates and high inflation will lead to a modest increase in problem loans. The increase in problem loans will be manageable as economies had recovered throughout 2021 and 2022.

"The deterioration in asset quality is likely to be more pronounced in markets with higher levels of private sector debt such as China, Thailand and Vietnam,” it explained.

However, it noted loan loss reserves relative to problem loans are very high for most APAC banks, providing a strong buffer against potential loan losses.

Moody’s said loan loss reserves are higher than pre-pandemic levels as banks have not released all reserves built up during 2020 and 2021. On average, they are 30 percentage points higher than 2019 levels.

Banks in emerging Asian markets generally maintain higher loan loss buffers relative to those in advanced Asian markets, it shared.

The research house viewed that APAC banks’ profitability will improve with higher interest rates, supporting capital generation however, debt sustainability will come into focus as the interest rates rise.

It noted that rising interest rates will increase debt burdens as credit growth in many markets has been strong. Debt service ratios are starting to weaken in Australia and South Korea while banks in Australia and New Zealand are exposed to house prices falling in 2023.

Moody’s also shared that slowing economic growth across the world will negatively impact exporting markets within APAC, raising risks for banks.

"Further softening of commodity prices can impact banks operating in commodity exporting markets such as Australia, Indonesia, Malaysia and New Zealand.

"Global trade will be impacted, in turn affecting manufacturing driven economies that are heavily reliant on trade such as South Korea, Malaysia, Thailand, the Philippines and Vietnam. A potential slowdown in global merchandise trade would also have negative implications for trade finance hubs such as Singapore and Hong Kong,” it said.

However, it said core capital ratios will remain unchanged in most systems as improving profitability will support capital ratios and capital levels will match growth in risk weighted assets.

A tightening of global funding conditions will have a modest impact as banks in APAC are predominantly funded by local currency deposits, which shield them from the impact of tighter financing conditions in global bond markets, it noted

"Rising interest rates will boost profitability with credit costs to increase modestly for APAC banks as net interest margins will expand as interest rates rise providing a boost to revenue even as loan growth slows down.

"Inflation will increase operating costs but revenue increases will be greater, improving profitability,” it added. - Bernama