Risks rise substantially for APAC banks, but credit profiles remain broadly intact – Moody’s | Daily News

Risks rise substantially for APAC banks, but credit profiles remain broadly intact – Moody’s

Eugene Tarzimanov
Eugene Tarzimanov

Moody’s Investors Service says in a new report that despite substantial risks, Asia-Pacific banks’ Credit worthiness should remain largely intact through the current economic downturn.

“We expect asset quality to deteriorate significantly as economic conditions remain weak, while profitability will take a hit from rising credit costs and declining margins,” Eugene Tarzimanov, a Moody’s Vice President and Senior Credit Officer said.

Moody’s expects problem loans will double on average across the 14 APAC economies by 2022. “Based on our financial and econometric models, we project that problem loans (NPLs) will double on average across the 14 APAC economies by 2022. Banks in India and Thailand will see the largest increases in NPLs due to the greater severity of economic shocks to their economies and the historically poor performance of certain loan types.”

“Our analysis is focused on cumulative outcomes at the end of 2022, rather than the precise timing of NPL formation, because various loan moratoriums implemented in response to the pandemic will delay the recognition of problem loans.”

In APAC economies, government guarantees and other support schemes will curb buildups in NPLs. Governments have implemented various support measures to lessen the economic impact of the pandemic. Among the 14 APAC banking systems, TCE ratios will decline the most significantly in Sri Lanka and India due to the severity of economic shocks to the countries, banks’ weaker starting solvency metrics, and historically weak underwriting. By contrast, capitalization will strengthen in Indonesia as a result of banks’ strong profitability. “We expect GDP will contract or significantly slow in 2020 in APAC economies, followed by recoveries in 2021 that will generally result in GDP remaining below its pre-pandemic level. We project that India, Thailand, Hong Kong and the Philippines will face the most significant GDP contraction in 2020, while China will be among the few countries that will avoid a recession thanks to ongoing policy support and decisive measures to contain the coronavirus outbreak.”

As such, asset risks for banks will grow substantially. Loans that will deteriorate the most in quality include unsecured personal loans, vehicle loans and loans to small and medium sized enterprises (SME) and large corporate active in industries disrupted by the pandemic the most, such as transportation, hospitality, leisure, retail and some commodities.

Changes in capital ratios will vary significantly among individual banks. TCE ratios at the majority of rated banks in India, Thailand and Sri Lanka will plunge by more than 200 basis points by 2022, while in other economies, the proportion of such weak performers will range from 10% to 30% of rated banks (Exhibit 8). In Malaysia, no bank will lose more than 100 basis points of TCE.

Meanwhile, rising credit costs and a 5%-10% drop in pre-provision income amid falling interest rates will drive a significant deterioration in profitability in coming years.

“In line with weak operating conditions, we expect capital ratios will decline at 78% of the 218 rated APAC banks by the end of 2022 from the end of 2019,” adds Tarzimanov.

“However, the decline at most rated banks will not be significant enough to prompt a change in our views on fundamental creditworthiness, which also take into account other factors such as profitability, asset quality, funding and liquidity.”

In some economies, government guarantees and other support schemes will curb buildups in NPLs. Among other measures, government guarantees for SME loans are a key part of efforts to protect jobs and ultimately public consumption. However, they will provide a limited boost to capital for banks in APAC.