Fitch Ratings’ outlook for Asia-Pacific (APAC) banks is a broad reflection of their ability to handle the risks of a less favourable external environment.
Strong profit and sound capitalisation in most markets mean that a rise in cyclically-low credit costs – due to a less buoyant macro environment – should be easily absorbed in most circumstances.
Funding structures are generally sound, and risks are coming down where there have been sensitivities in the past – such as in Australia and Korea.
Fitch forecasts emerging Asia’s GDP growth in 2013 to rise by 6.4% from an expected 6.0% in 2012. Asia remains the strongest region, but forecasts have been progressively cut – and downside risks remain.
Forecasts for Asia’s high-income countries have also been cut. Economies with structural weaknesses, such as larger fiscal deficits or external imbalances, have less scope for policy flexibility to offset the slowdown.
Viability Ratings (VRs) are under pressure in China and India. Fitch’s concerns over the effect of China’s rampant credit growth on bank credit quality and solvency are now becoming evident.
India’s more protracted slowdown means that the credit fundamentals of state-owned banks are also under pressure after a build-up of risk concentrations and rising non-performing loans. Indian banks’ Foreign-Currency Issuer Default Ratings (IDRs) are on Negative Outlook, reflecting the Outlook on the sovereign’s ratings.
Upward ratings momentum will be constrained by emerging Asia’s high and/or rapidly rising leverage – which has led to a build-up of risk in a number of banking systems – together with greater exposure to China. Hong Kong’s strong economic ties with China, and its banks’ growing exposure to the mainland, means its banks are also sensitive to these potential downside risks. A moderation of regional credit growth trends due to lower GDP growth would help to reduce the potential for a further build-up of risk.
Asian growth and regional integration will see internationalisation as an ongoing strategic theme, but protectionist tendencies will limit large cross-border bank deals.
Japan’s banks are looking abroad to offset a weak home market; China’s majors are being encouraged to follow clients globally; and ASEAN banks continue to consider regional options.
Basel III is forcing banks to consider the merits of minority bank stakes, due to capital charges.
What Could Change the Outlook? The risks from rapid Chinese credit growth and the wealth management product activities have the potential to hurt China banks’ VRs. Likewise, banks in low-rated Mongolia, Sri Lanka and Vietnam are more sensitive to an economic slowdown – in light of the risks attached to recent credit growth and the overhang of past excessive credit growth, or other structural weaknesses in these lower-income economies. China Hard Landing is also a risk. A hypothetical 300 basis point hit to China’s GDP in 2013, while not Fitch’s base case, shows economies with large trade links hardest hit. Taiwan, Korea and Thailand would be affected most, while Japan is most exposed among the major advanced economies – as are the open economies of Hong Kong and Singapore. This would add pressure on bank VRs. Sovereign rating actions, for e.g. a change of India’s Foreign-Currency IDR – currently on Negative Outlook – would have a direct impact on the IDRs of Indian banks.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Mark Young is a Managing Director heading up the Asia Pacific region in Fitch Ratings’ Financial Institutions Group. Prior to moving to Singapore in 2011 Mark had 11 years of experience in ratings covering developed and developing markets at Fitch based in London. Previous to this he was based in Fitch’s South African office.