Asian banks face profit strain in 2025

Falling interest rates could heighten some lenders’ appetite for risk.

Banking profits are expected to remain under pressure in many Asian markets in 2025, with lenders likely to post either modest improvements or manageable declines, according to analysts.

Thai banks will face loan repayment problems from small and medium enterprises (SME), whilst their Malaysian and Vietnamese peers face the same problem involving the property sector, Fitch Ratings said in a 29 November report.

“[Thailand’s] SME and retail client segments remain particularly vulnerable in the wake of pandemic-era debt restructurings, which reached 10% of total loans and amidst a slow economic recovery,” the debt watcher said.

Banks’ real estate exposures are also a problem in the Philippines and Malaysia, where commercial property vacancy rates remain elevated, S&P Global Ratings said in a separate country-by-country 2025 outlook report released on 14 November.

Malaysian banks have significant exposure to real estate development at about 8%, though they have gradually cut their loans to the sector, credit analyst Sue Ong wrote in the report. She expects credit demand to improve with faster economic growth, and profitability to stay range-bound.

Meanwhile, a dip in net interest margins could lead to a decline in Hong Kong lenders’ profitability next year, Shinoy Varghese, S&P primary credit analyst, wrote in the S&P report.

“We expect any potential negative impact on asset quality from Hong Kong and China commercial real estate to be manageable,” he added.

In China, banks should replenish capital as the state’s stimulus package puts pressure on their income, primary credit analyst Ming Tan wrote in the same report. “Loan growth is likely to be about 9%, as banks with strained profitability moderate asset growth to preserve capital.”

The Asia-Pacific region’s credit landscape is set for more volatility and slower growth in 2025 amidst uncertain trade and foreign policies under US President-elect Donald Trump, S&P said in a December 2024 report.

Countries with a large trade surplus with the US like Vietnam, Thailand, Malaysia and India would be vulnerable to universal tariffs, it said, adding that a global trade slowdown could curb growth and squeeze Asia-Pacific currencies and exporters' revenues.

“More US tariffs against Chinese exports could slow China's export growth driver,” Eunice Tan, head of Asia-Pacific Research at S&P, said in the report. “For export-centric Asia-Pacific, a slower China and softer global trade will hit revenue and growth.”

Risk appetite
On the other hand, declining interest rates might spur banks to move further down the risk curve to support their earnings, Fitch said. “This shift could manifest with increased exposure to higher-yielding assets, a trend already observed in the Philippines and India, particularly in unsecured retail lending where pressures are mounting.”

Banks might also pursue more overseas expansion in riskier markets, as seen in Thailand, it added.

Meanwhile, Bangladeshi banks’ weak profitability would continue in 2025, though the slowdown in credit growth should help ease the tight liquidity situation of its banking system, Varghese said. “As the central bank tries to tame inflation, interest rates are anticipated to stay high in 2025, potentially slowing loan growth.”

Slowing loan demand in Cambodia could ease funding strain, but covenant breaches pose risks, Ruchika Malhotra, primary credit analyst for S&P, said in the November report.

Banks in Sri Lanka and Vietnam are expected to continue improving their financial performance in 2025. The political and economic crises in Sri Lanka are receding, analysts said.

The country is reportedly close to completing its foreign-currency debt restructuring, which could lift its default status and improve its credit profile, according to Fitch. “Successful restructuring would ease the burden on banks’ financial profiles, boosting business generation and revenue prospects in 2025.”

In Vietnam, higher loan growth and lower credit costs are expected to sustain banks’ financial performance. “Banks are likely to continue to run down their reserve coverage as they become more optimistic about the economic outlook, leading to lower credit costs,” Fitch said.

Restructured loans under relief make up a modest proportion of system loans, and most large banks in Vietnam have fully provisioned for these, limiting the risks to their earnings and balance sheets, Fitch said.

Meanwhile, credit losses among Philippine banks are expected to be flattish, whilst earnings moderate in the next two years. Credit growth could improve but costs might rise, Nikita Anand, primary credit analyst for S&P, said in the November report.

“The rising share of higher-risk and higher-yielding consumers loans is likely to lead to a manageable deterioration in the nonperforming loan ratio,” she said, adding that large companies, which form the bulk of the banking sector’s loan portfolio, should remain resilient.

“Banks with higher exposure to unsecured loans could see elevated credit costs as the portfolio matures,” she added.

In Singapore, banks’ net interest margins have peaked in 2024, which means dampened profit growth in the next 12 months. “Singapore banks’ profitability is more sensitive to margins rather than loan growth. The pickup in volumes can mitigate, but likely not offset, the slowdown in profit growth,” said S&P primary credit analyst Ivan Tan said in the same report.

He expects Indonesian banks to benefit from the country’s “buoyant economic growth,” with controlled credit costs and high net interest margins supporting overall profitability.