Asia-Pacific banks’ ratings to stay stable

RATINGS of banks in the Asia-Pacific region are seen to remain stable this year despite elevated interest rates and other external headwinds, S&P Global Ratings said.

“Asia-Pacific banks are managing property-sector risks and the vast majority have stable ratings outlooks,” S&P said in a report on Tuesday.

“Bank rating stability is likely to persist through 2024 in Asia-Pacific. This is even considering ongoing property sector risks, persistent higher interest rates and lower growth, and continuing high public and private sector indebtedness,” it added.

The Bangko Sentral ng Pilipinas (BSP) has hiked borrowing costs by 450 basis points (bps) from May 2022 to October 2023. This brought the policy rate to 6.5%, the highest in nearly 17 years.

Most Philippine banks posted higher net earnings last year, with some even booking record-high profits boosted by elevated interest rates.

Latest data from the BSP showed that the net income of the banking industry rose by 15% to P356.49 billion in 2023 from P310.12 billion in 2022.

“In the past year, profitability for most banks was boosted mainly because of the interest margins benefit associated with higher interest rates. While this also contributed to incrementally higher credit losses for some banks, these were of a magnitude that could be absorbed at current rating levels,” S&P Global said.

“We do, however, anticipate that some banks may ultimately be challenged to maintain asset quality metrics if interest rates remain elevated above our base case and weigh down further than we expect on economic growth prospects,” it added.

Data from S&P showed that about 95% of banks in the region had stable rating outlooks as of April 3.

“This resilience is largely due to solid capitalization, improved profitability, and still-sound asset quality. We expect Asia-Pacific real GDP (gross domestic product) growth will be slightly slower at 4.4% in 2024 from 4.8% in 2023.”

The Philippine government is targeting 6-7% growth this year. The economy expanded by a weaker-than-expected 5.5% in 2023.

“We do not foresee the emergence of a more general upward ratings trend occurring. Various idiosyncratic country risk factors have been the main drivers of recent rating upgrades for some banks in the region,” the credit rater said.

“More so, risks across the region mainly remain on the downside. Should downside risks emerge, some banks may be challenged to maintain their stable outlooks.”

Meanwhile, S&P Global said that risks to the outlook remain on the downside.

“We see limited upside ratings potential during 2024, given higher-for-longer interest rates and weaker economic growth,” it said.

“More so, if downside risks emerge on property or other areas, it could become more challenging for banks to maintain outlooks at current levels,” the debt watcher said.

Property will likely be the biggest risk for most Asia-Pacific banks, S&P Global said.

“Our base case is that most banks can contend with higher property sector and other stresses in the context of current ratings and outlooks. Should a downside scenario emerge, negative ratings momentum would clearly be an increasing possibility.” —