Moody’s says Asian banks’ asset quality weakening

The credit quality of banks in the Asia Pacific has likely hit a cyclical peak and many of the region’s lenders will suffer a drop in asset quality over the next 1-2 years as interest rates rise, Moody’s Investors Service warned on Tuesday.

Moody’s this week lowered its outlook on Singapore’s banking system to negative from stable, citing potential risks from rapid loan growth and rising real estate prices.

Its warning about the Southeast Asian city-state comes about a month after it cut its outlook on Hong Kong banks.

Moody’s said Asian banking systems have been operating in a favourable environment for an extended time, with low interest rates, robust economic growth and strong loan growth.

“However, during that period, borrowers’ leverage has increased, asset prices have materially appreciated and in the process both borrowers and banks may have become more susceptible to asset quality deterioration,” Stephen Long, managing director of Moody’s Asia Pacific financial institutions group, said in a statement.

“The exit from loose monetary policies in the developed economies will test Asian banks’ asset quality during the next 2-3 years,” he said.

Speaking later at a media briefing, Long said Chinese banks faced pressures on asset quality, profitability and liquidity management due to slowing economic growth and government efforts to rebalance the economy by putting more emphasis on consumption and relying less on exports and investments.

“But in our base case scenario, the banks will avoid a hard landing and will also have no problems meeting Basel III.”

Moody’s said Asian banking systems have been operating in a favourable environment for an extended time, with low interest rates, robust economic growth and strong loan growth

ASEAN

Moody’s said it continues to have a stable outlook on the banking systems of most countries that make up the Association of Southeast Asian Nations (ASEAN), although it noted “moderate weakening” in the asset quality of Malaysian banks.

Jean-Francois Tremblay, associate managing director of Moody’s Asia Pacific financial institutions group, also flagged longer-term concerns about asset quality as well as funding and liquidity in Thailand and in the operating environment for Indonesian lenders.

The exception was the Philippines, where credit quality is still at “an early point of an upcycle”, he said, citing the relatively modest appreciation in home prices as well as household credit that is still very low relative to the size of the economy at around 5 percent of gross domestic product (GDP).

Moody’s last month cut its outlook on Hong Kong’s banking system, citing the territory’s growing exposure to borrowers in China, where non-performing loans at Chinese banks have been rising in recent quarters.

China’s growth has slowed down in nine of the last 10 quarters as weak overseas demand weighed on output and investment.