Asia Pacific banks resilient to risks but upgrade prospects slim: Fitch

Monday, 17 December 2012 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings said yesterday the Stable Outlook for 2013 for Asia Pacific (APAC) banks reflects broadly their ability to handle the risks of a less favourable external environment. Prospects for upgrade, however, are held back by rising leverage across Asia Pacific and the risk of a sharper slowdown in China.

“Banks generally have strong absorption capacity given their sound profit and capitalisation levels,” says Mark Young, Managing Director in Fitch’s Financial Institutions team. “This will position them well in the face of pressures from a softer but still solid, by global standards, economic growth environment.

“Funding structures are also generally well placed, and risks are coming down where there had been sensitivities in the past, such as in Australia and Korea,” Young said.

In a special report published today, Fitch says China and India remain the weak spots where the Viability Ratings (VRs) of banks in these markets are under pressure. Fitch’s concerns over the effect of China’s rampant credit growth on bank credit quality and solvency are now becoming evident. In addition activity in wealth management products has the potential to hurt China banks.

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.

Risks that could also impact ratings negatively include a China hard landing. While not Fitch’s base case, a hypothetical 300bp hit to China’s GDP in 2013 shows economies with large trade links hardest hit. Taiwan, Korea and Thailand would be affected most, while Japan is most exposed among major advanced economies, as are the open economies of Hong Kong and Singapore. This would add pressure on banks’ VRs.

Another trend to monitor is the rising levels of leverage across the region which is constraining upward momentum of ratings. Beyond China, high and rapidly rising leverage has led to a build-up of risk in Hong Kong and Indonesia as well as in the lower-rated countries of Mongolia, Sri Lanka and Vietnam which are more sensitive to an economic slowdown.