SEA banks’ asset quality visibility still cloudy amidst extended loan relief schemes

Non-performing loan ratios will likely peak only by end-2021 or 2022, when relief measures expire.

Asset quality visibility of banks across Southeast Asia will remain “clouded” into 2022, according to Fitch Ratings, as loan relief schemes have been extended. This is likely to keep credit costs high in the near term, the ratings agency warned.

Loans under relief as of March 2021 have generally declined from their peaks in 2020, as restructuring measures have become more targeted in scope.

But the real challenge to banks’ asset qualities will only be measured at end-2021 or early 2022, when the loan moratoriums expire and underlying asset quality conditions bubble to the surface.

"The normalisation of credit costs may take longer in markets where relief has been extensive but economic outlooks remain under pressure, such as in Malaysia and Thailand," Fitch said.

Fitch expects non-performing loan (NPL) ratios to peak only after 2021 when relief measures expire. On the upside, many banks have booked higher credit provisions in 2020 before the rise in NPLs.

“The return of credit costs to pre-crisis levels would depend on how much provisions banks have set aside relative to the pace of the economic recovery and credit impairment expectations in each market,” the ratings agency said, adding that amongst markets Singapore banks are ahead of the curve on these fronts.