Prolonged Covid-19 will hurt profitability, asset quality of APAC banks
KUALA LUMPUR: Asset quality and profitability of banks in Asia Pacific ( APAC) will be negatively impacted if COVID-19 intensifies and the disruptions stemming from it are not contained in the next few months, said Moody’s Investors Service.
In its 19th edition of Inside Asean, Moody’s said there would be limited credit impact on APAC economies and banks if the virus- related disruptions are short-lived even though the severity and length of the outbreak remain highly uncertain.
It said if the outbreak lasts for a prolonged period and become more severe, APAC banks would be affected as people travel less, causing economic growth and employment conditions to weaken in jurisdictions that are dependent on foreign travelers, thus hurting banks’ asset quality, in turn, driving up credit costs and weakening profitability.
Prolonged disruptions would also have an impact towards commodities, as weaker demand from China could drive down commodity prices.
“In that scenario, economic growth in commodity exporting countries can slow, with the financial health of commodity companies deteriorating, posing risks to banks’ asset quality.
“On financial markets, prices of financial assets are likely to decline if disruptions from the outbreak persists.
“This will result in declines in the values of mark-to-market securities held by banks and falls in revenue from financial markets,” it said.
Of the 482 companies that it rates in Asia- Pacific, Moody’s said 20 per cent have high exposure to disruptions from Covid-19, 36 per cent have moderate exposure and 44 per cent have low exposure.
Of the companies with high exposure, 67 per cent have negative outlooks or are under review for downgrade, weak liquidity, or both. Refinancing risk is high for 27 per cent of the high exposure companies, given their large debt maturities and capital-market tightening.
These industries are airlines, auto manufacturing, auto parts supply, oil and gas, gaming, global shipping, discretionary retail, and hospitality.
Meanwhile, most of the moderate exposure companies operate in the property development, mining and steel, protein and agriculture, chemical, and refining and marketing industries, while exposure is low for companies providing essential goods and services, telecommunications, IT services, and engineering and construction.