Here’s what Asia Pa­cific banks will be­come in 2013

The Pak Banker - - COMPANIES/BOSS -

FBy Mark Young ITCH Rat­ings’ out­look for Asia-Pa­cific 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 high­in­come 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.

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