KUALA LUMPUR – The outlook for the Asia Pacific (APAC) banking sector is stable based on relatively stable economic conditions, high loss margins and increasing profitability, Moody’s Investors Service said. The economic outlook is supportive, albeit muted, for banking growth and solvency, the research firm said.
“Real gross domestic product (GDP) growth will be subdued but remain healthy for many APAC markets. Tougher working conditions in developed Asian markets will be weighed down by high inflation and rising rates of interest will have an impact,” he said in a statement today.
Moody’s said the global economic slowdown will cause challenges in markets highly dependent on trade and exports, such as Bangladesh, Mongolia, and tourism, such as Thailand.
On the other hand, he pointed out that China’s growth slowdown will hit banks in Hong Kong, China and Taiwan. Through other channels, this will have an indirect impact on banks in Australia, Indonesia, Mongolia, New Zealand and Thailand.
The research house also noted that asset risks will increase but borrowing costs will rise only marginally as banks hold larger loss-absorbing reserves.
“Slower economic growth, higher interest rates and higher inflation will lead to a moderate increase in non-performing loans. The increase in non-performing loans will be manageable when economies recover in 2021 and 2022 .
“The deterioration in asset nice is possibly to be referred to in markets with immoderate private quarter debt collectively with China, Thailand and Vietnam,” he said.
However, he noted that loan loss provisions in most APAC banks are higher than problem loans, providing a strong buffer against potential loan losses.
According to Moody’s, loan default reserves are higher than before the pandemic because banks did not release all the reserves they accumulated in 2020 and 2021. On average, they are 30 percent above 2019 levels.
He said banks in emerging Asian markets tend to have higher credit losses than banks in developed Asian markets.
The research house noted that APAC bank profitability growth will improve interest rates, which will support capital formation; With interest rates rising, however, the focus is on debt sustainability.
He pointed out that a rise in interest rates will increase debt burdens because credit growth is strong in many markets. Debt service ratios are starting to weaken in Australia and South Korea, while banks in Australia and New Zealand face falling house prices in 2023.
Moody’s also noted that slower global economic growth will negatively impact APAC export markets and increase risks for banks.
“Another decline in commodity prices could affect banks operating in commodity-exporting markets such as Australia, Indonesia, Malaysia and New Zealand.
“Global trade will be affected, which in turn will affect trade-dependent, manufacturing-led economies such as South Korea, Malaysia, Thailand, the Philippines and Vietnam. A possible slowdown in global trade in goods. Impact on trade finance hubs like Singapore and Hong Kong,” he said.
However, he said the Tier 1 capital ratio will remain unchanged in most systems as improved profitability will support the capital ratio and capital levels will reflect growth in risk-weighted assets.
The tightening of global financial conditions will have little impact as APAC banks are primarily funded by local currency reserves, protecting them from the impact of tighter financial conditions in global markets. bonds.
“Rising interest rates will increase profitability for APAC banks along with the cost of borrowing as net interest margins will expand as rising interest rates boost earnings even as growth of credit has slowed.
“Inflation will increase operating costs, but revenue growth is higher, already will improve profitability,” he added. -Bernama
