How will Asia Pacific banks fare in 2013?

Check out what Fitch and Moody's have to say.

ABF: What are the most prominent issues in Asian banking that should we watch out for this 2013?

Fitch Ratings: Mark Young, Managing Director & Head of Asia Pacific Financial Institutions Group
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.

Moody's: Stephen Long, Managing Director for Moody's Financial Institutions Group in Asia Pacific
The broad credit outlook for banks in the Asia Pacific region in 2013 is stable on the expectation that they will remain largely insulated from the negative credit pressures affecting their peers in many Western economies.

"We consider that this stable outlook is driven mainly by the region's economic resilience; its relatively accommodative monetary policy; and the banks' own strong liquidity when compared to global norms, as well as their relatively robust capital buffers," says Stephen Long, the Managing Director for Moody's Financial Institutions Group in Asia Pacific.

Long was speaking on the release of Moody's "Asia Pacific Banking Outlook 2013", which examines the trends for 14 banking systems in the region. On an individual basis, a total of 11 show stable outlooks, while the Philippines exhibits a positive outlook, and India and Vietnam negative outlooks.

"For the region, in terms of specifics, we consider that the economic recovery from the troughs reached in mid-2012 will continue in much of the region in 2013. At the same time, interest rates will remain low, making an asset quality shock unlikely during this year in most Asian countries," says Long. "In addition with liquidity, the vast majority of Asian banks are ready to adopt Basel III capital standards, which are being implemented in much of the region in 2013, even though some Asian regulators have announced delays."

The report further examines six key themes for banks in Asia in 2013, including: the expectation that the modest cyclical deterioration apparent, in asset quality should fade by mid-year; the consideration that the region's very low interest rates -- while providing further reassurance that an asset quality shock is unlikely -- are also creating longer-term risks; and the expectation that Chinese banks although will avoid a hard landing, longer-term issues remain unresolved.

In addition, the report argues that Asian banks are well-placed to meet the capital standards of Basel III; the banks will carry on with their overseas expansion, though at a more moderate pace than that evident in 2012; and while the region's regulators will focus on ensuring that new-generation capital instruments meet Basel III requirements, they will still refrain from seeing any urgency in pressing ahead with broader resolution tools that could impose losses on creditors.

In terms of individual banking systems, the report says that with the Chinese banks, the risks of a systemic crisis materializing in 2013 are low. And while loans to real estate developers and to local government financing vehicles (LGFV) will remain sources of long-term asset quality concerns, Moody's sees the risks of significant distress in 2013 as contained, respectively by a recovering real estate sector and the Chinese government's active management of the LGFV refinancing process.

With Japan, the credit conditions for its banks will remain stable despite a generally weak economic outlook. The major banks will continue to take advantage of their relatively strong financial profiles and the retreat of European banks by expanding overseas, both in terms of their loan books and in terms of strategic investments.

For banks in several export-related economies, such as Hong Kong, Singapore, Taiwan, Malaysia, Korea and Thailand, macroeconomic recovery will mean that any cyclical rise in non-performing loans (NPLs) will be modest.

However, tightening liquidity (except for Korea, where Moody's expects loan-to-deposit ratios to continue to decline) will remain a feature as these banks' dollar loan books will keep outstripping deposit gathering in their own currencies.

The outlook for banks in Australia and New Zealand remains stable as these economies continue to exhibit good growth prospects in the near-term, driven by ongoing resources-sector investments in Australia and earthquake reconstruction in New Zealand.

With the positive outlook for the Philippines, Moody's says its banking system will remain relatively immune to global shocks and continue to benefit from steady credit growth. Indonesia shares many of these positive attributes, but Moody's stable system outlook includes more policy uncertainty, as well as greater risk of asset quality pressures due to relatively rapid recent loan growth.

At the other extreme, Vietnam and India have negative outlooks. The Vietnamese system is in much worse shape than India's and there is a reasonably high probability that the government will need to step in and take measures to address the issue of high NPLs, or face the negative economic consequences of a banking system that cannot support credit growth.

And in India, impaired loans are yet to peak among public sector banks. While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained.