Banks in region have good buffer vs currency woes–S&P

Banks in the Asia-Pacific region appear fairly well-padded against recent currency depreciations, according to a report, titled “Asia-Pacific Banks Seem Sufficiently Cushioned Against Currency Depreciation,” that Standard & Poor’s Ratings Services (S&P) recently released.

“Many banks in key Asia-Pacific markets are sufficiently insulated against the strain on their local currency, typically because of their low foreign-currency exposure and hedging policies,” said S&P credit analyst Geeta Chugh.

“The effect of currency volatility on banks’ corporate borrowers in most countries will have limited impact on the banking sector’s asset quality. We, therefore, don’t believe that the credit profiles of major banks are under added strain,”Chugh said. While the Asia-Pacific hasn’t been as severely affected as other regions, several Asian currencies have weakened significantly against the US dollar in the past two months.

The Malaysian ringgit and Indonesian rupiah have been among the worst performers, partly exacerbated by China’s devaluation of the renminbi.

“Individual banking systems have specific strengths or vulnerabilities that could become more apparent if local currencies remain under a prolonged period of intense pressure,” said Chugh.

The weakening of the ringgit against the US dollar is likely to have a muted impact on Malaysian banks, given the sector’s minimal exposure to foreign currency loans and funding.

Similarly, the slide in the rupiah is likely to have only a minimal impact on Indonesia’s major banks because of their low exposure to unhedged foreign currency and their robust regulatory capital ratios.

Indian banks are also largely cushioned from the recent depreciation of the rupee. That’s primarily because they are domestically funded in local currency, and foreign-currency assets and liabilities are mostly matched.

The direct and indirect impact of currency depreciation is insignificant on the banking systems in Australia and New Zealand. The resilience of these two systems is largely attributable to their fully floating currencies.

A weakening renminbi could be neutral to positive for both the Chinese economy and the banking sector, it said.

“Our view is based on the significant contribution that such a weakening would make to the orderly consolidation of China’s sizable export segment, the net external asset position of China’s banking sector, and growing fee income from the currency hedging business,” S&P said. LUIS LEONCIO