Fitch: APAC bank rating outlook broadly stable; downside risks exist

Wednesday, 1 February 2012 00:03 - - {{hitsCtrl.values.hits}}

Fitch Ratings said yesterday the ratings Outlook for banks in the Asia-Pacific (APAC) region is Stable and reflects the ability, at the banks’ existing rating levels, to weather the weaker global economy and/or the expected ability and willingness of the respective sovereign to provide support.

Key elements to this rating Outlook include the ability to absorb higher credit losses as a result of the global economic headwinds, as well as the strength of funding structures.

Potential downside risks are, however, present. The agency remains cautious on Chinese banks; funding and liquidity pressures are increasing as these banks balance rising forbearance/asset quality burdens with the pressure to lend in support of economic growth. This adds downward pressure on Viability Ratings (VRs) within China, and could also affect the VRs of banks based in regional centres where exposure to China has grown - this includes Hong Kong and Singapore.

Downside risk is also heightened by potential economic contagion from Europe and/or a structural economic deterioration in China.

A trend that will be evident in 2012 will be rising NPL ratios across the region, but, with most banks at near cyclical low points, Fitch notes this trend is expected. Countries that may surprise on the upside should conditions deteriorate further are China, India and Vietnam.

Pre-provision profits are expected to remain adequately strong, and should absorb risks from some downward pressure on earnings from higher impairment charges and slower loan growth. Thin profitability, however, remains a feature of the Japanese and Taiwanese banking sectors. Capital adequacy is unlikely to be under threat for most banks. Markets where capital pressures do exist are China, Vietnam, Mongolia and India.

With the exception of a few APAC markets, bank funding structures are considered a rating’s strength with healthy loan/deposit indicators, based on largely deposit-funded balance sheets. More wholesale-funded markets, such as Korea and Australia, have been strengthening liquidity. That said, the Rating Watch Negative for the four major Australian banks largely reflects Fitch’s view that despite significant improvements, these banks continue to have a weaker funding profile than other similarly highly rated global peers.