Moody’s Investors Service has revised to stable from negative its outlook for banks in Asia Pacific as banking risks in the region are stabilizing due to stable or improved operating conditions.
“Asset quality is stabilizing in most banking systems, as the negative
credit cycle in many of these systems has proven to be shallow with a
moderate economic upturn now evident in APAC, while commodities prices
are relatively stable,” says Stephen Long, Moody’s Managing Director for
Financial Institutions in the region.
Moody’s conclusions are contained in its mid-year update of its annual
outlook on banks in APAC, “Banks — Asia Pacific, Stabilizing credit
cycle”, published on 3 July 2017.
The industry outlook indicates the rating agency’s forward-looking
assessment of fundamental credit conditions that will affect the
creditworthiness of the banking industry over the next 12-18 months.
“A total of 77% of bank rating outlooks in APAC are now stable, up from 64% at end-2016, while banks in China, Hong Kong, Singapore, Australia,
New Zealand and Mongolia are mostly behind the increase in stable outlooks, following rating downgrades in some cases,” adds Long.
Moody’s further believes that commodity-related problem loans have mostly
peaked and the rating agency’s expectation of relatively stable energy
and other commodity prices in 2017 should support bank asset quality in
Moreover, capitalization and profitability show good levels against risk,
while capital buffers are generally higher due to moderating growth in
risk weighted assets and more stringent regulatory requirements.
Profitability will recover in many markets because of lower credit costs
and stable to higher net interest margins.
Funding and liquidity will also remain a credit strength, and most APAC
banks are mostly deposit funded with a moderate reliance on wholesale
sources — with the exception of Australia, New Zealand and Mongolia —
and liquid balance sheets.
Foreign capital flows are also returning to emerging Asia, although the
risk of reversal remains due to market uncertainty around US interest
rates and US dollar strengthening, China’s re-balancing, potential
policy changes in key economies, and global/regional political issues.
In terms of long-term risks, corporate and household leverage remain
elevated in parts of APAC, but the build-up has slowed, supporting the
banks’ asset quality. Furthermore, property prices are rising in many
economies, amplifying bank credit risks in the case of a major market
Latent property-related risks are more pronounced in Australia, China,
Hong Kong, New Zealand, Malaysia and India, based on property price
appreciation, the banks’ exposure level, or both.
Moody’s expects that the trend for government support will be stable for
the majority of APAC banking systems. This is because regulators are not
keen to embrace wider bail-in measures and early public support remains
the preferred way to prevent banking stress in most systems. The
exception rather than the rule is Hong Kong, which is moving closer to an
operational resolution regime and will likely implement one in 2017, and
this situation could lead to a lower level of government support uplift
for some banks.
The banking systems where Moody’s has coverage in Asia Pacific include,
with the advanced economies, Australia, Hong Kong, Singapore, Japan, New
Zealand, Korea and Taiwan. In the case of the emerging and developing
economies, they include China, Bangladesh, India, Indonesia, Malaysia,
Mongolia, Thailand, the Philippines, Sri Lanka and Vietnam.
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