Asian banks asset quality seen to be intact

“As loans reprice faster than deposits, banks’ NIMS have benefited during the early part of the rate hike cycle.” CGS-CIMB Research

PETALING JAYA: The asset quality of Asian banks generally is seen to be manageable amid the rising interest rates, says CGSCIMB Research.

The net interest margins (NIMS), which are a measure of profitability for banks, are also heading north in the wake of a higher interest rate environment to combat strong regional inflationary pressures.

These are some of the key takeaways at the recent regional

financial conference hosted by CGS-CIMB Research for 19 financial companies across Hong Kong, mainland China, Singapore, Indonesia, Thailand, Malaysia and the Philippines.

The research house said it has retained Indonesia and Singapore within its top three regional banking sector picks, but has substituted Thailand for South Korea, with Thailand ranking third in the pecking order.

With interest rates rising rapidly across Asia ex-china and inflation still at a relatively high level, ongoing increases in NIMS are a clear cross-regional theme for many banks, explained CGSCIMB Research.

“Some banks indicated that deposit competition is intensifying, with deposits shifting towards higher-cost time deposits and away from lower-cost current and saving accounts (CASA).

“As loans reprice faster than deposits, banks’ NIMS have benefited during the early part of the rate hike cycle, for example, the Singapore banks saw NIM rising on average by more than 30 basis points (bps) quarter-on-quarter (q-o-q) in the third quarter.

“As deposits start to reprice upwards and as the cyclically high CASA mix starts to normalise, the pace of rising NIM q-o-q should slow going forward, in our view,” it added.

Despite rising interest rates, CGS-CIMB Research noted that the message from the banks is that asset quality risks are still manageable and provisioning buffers are adequate. The continued fall of credit costs year-onyear was also a theme for a number of banks.

Toward this end, the research house has recommended an “overweight” call on the Asian banking sector and for all banking sectors under its coverage across the region, apart from China, where it has a “neutral” rating on the sector.

The potential re-rating catalysts continued to be rate hikes, improving NIMS and rebounding return on equities.