APAC banks' outlook stable, but face uneven recovery: Moody’s

Bank to maintain solid balance sheets with stable liquidity.

The expected economic recovery in APAC will solidify in 2022 as pandemic effects subside, which should support banks’ creditworthiness—although the pace of recovery will be uneven, according to Moody’s.

Diversified economies and those with higher vaccination rates will rebound faster, with about half of APAC economies seeing a growth rebound relative to pre-pandemic years, the ratings agency said.

“Banks will maintain solid balance sheets with stable solvency and liquidity metrics. Problem loans will increase modestly with the ending of remaining government support measures in most markets, however, their strong credit reserves will mitigate the related asset risk for banks,” said says Eugene Tarzimanov, a Moody’s vice president and senior credit officer.

Tarzimanov added that core capital ratios will remain stable as improving profitability will support credit growth, dividend payouts and share buybacks.

Some central banks may choose to raise interest rates amidst higher inflation and fewer disruptions caused by the pandemic. Overall, however, monetary policy will remain largely accommodative or neutral in most APAC economies.

“Whilst private debt levels are high, generally low-interest rates and the broad economic recovery will support bank borrowers' debt repayment capacity,” Tarzimanov said.

Meanwhile, high asset prices across APAC will have mixed credit implications for banks. On the one hand, property price inflation is expected to strengthen its collateral value. 

But it also increases the risk of a sudden market correction if economic or financial market conditions abruptly deteriorate, Moody’s warned.

Meanwhile, high commodity prices are positive for banks in commodity-exporting economies like Indonesia and Malaysia, as well as trade finance hubs like Singapore and Hong Kong. 

On risks associated with ESG standards, banks in Asian emerging markets will remain more exposed to carbon-transition risks compared with those in advanced markets, because emerging market economies are less diversified with large commodity-related industries, Moody’s said. 

Moody’s expects APAC regulators to introduce more rules to support and guide banks in this transition to low carbon or more environmental-friendly portfolios.