Why Asian banks are resilient to changing credit conditions

Thanks to strong internal buffers.

Moody's Investors Service says the long positive credit cycle enjoyed by the banks in Asia (ex-Japan) may be about to peak, introducing new challenges for the lenders, as pockets of risk will emerge, due to potentially tighter global monetary conditions. However, Asian banks have been noted to be generally resilient to changing credit conditions.

According to a release from Moody's, Eugene Tarzimanov, Vice President and Senior Credit Officer at Moody's Financial Institutions Group in Asia Pacific, said that when US interests start to gradually rise, the overall resulting tighter global liquidity will lead to higher interest rates in Asia.

"On balance, however, the credit profile of banks in Asia will prove resilient to the adverse effects of higher interest rates, such as somewhat higher problem loans, because of their strong internal buffers," adds Tarzimanov.

Moody's points out that after the 2008 global financial crisis, Asian banks (ex-Japan) have generally enjoyed a sustained period of positive credit conditions, driven by steady economic growth, moderate inflation rates and increasing regional trade.

Here's more from Moody's:

Moreover, the very low interest rates evident in Asia since 2008 have fuelled rapid credit growth in most Asian economies, and contributed to material rises in property prices in major urban areas.

As a result of extensive new borrowings by non-financial corporates and households, domestic credit -- as a share of GDP -- increased to a high 120%-150% in many Asian economies at the end of 2013. From an historic perspective, these levels are particularly elevated when compared to around 50%-80% in the early 1990s.

Moody's considers that, as interest rates gradually rise, a small share of overstretched borrowers in Asia could face difficulties servicing their loans, resulting in somewhat higher problem loans for Asian banks.

Furthermore, corporate leverage ratios in emerging Asian economies like China, Thailand, India, Indonesia and the Philippines have deteriorated, leading to Moody's conclusion that the quality of corporate exposures in emerging Asia may deteriorate to a somewhat greater extent, compared to the more advanced markets whose leverage has been more stable.

Moody's notes that most Asian banking systems are characterized by low levels of problem loans, ranging from 0.5% in Hong Kong to around 2% for banks in Southeast Asia at end-2013.

As a result, any deterioration in the quality of loan books is starting from a strong base.

In addition, their profitability levels are healthy, with average pre-provision incomes to risk weighted assets of around 3%, and net income to risk weighted assets of around 2%.