S&P: Asian slump to hurt banks, but the Philippines to be spared

Sluggish economic growth in the Asia-Pa­cific region in 2016 is a key risk for banks in the region, credit watch­dog Standard and Poor’s Ratings Services (S&P) said in a report.

Moreover, high-impact stress from China, while a low-probability occurrence, could hurt many Asia-Pacific banking systems through their direct and indirect exposures, the report, titled “Even as China Risk Looms Large, Economic Sluggish­ness is a More Real Chal­lenge For Asia-Pacific Banks in 2016,” said.

The Philippines seem to have been spared from the risks due to strict measures implemented by the Bangko Sentral ng Pilipinas (BSP) in requiring banks to comply with international standards on bank capital and risk exposures.

Thailand is the most ex­posed, followed by Malaysia, South Korea, and Singapore in that order, the report said.

“We expect credit losses of Asia-Pacific banks to rise as growth in major regional economies is likely to slow down,” S&P credit analyst Geeta Chugh said.

“China’s slowing econ­omy has also set the stage for increasing credit losses for these banks,” she added. S&P believes that Asia-Pa­cific banks have sufficient cushion to absorb higher credit costs.

These banks have built up sufficient capitalization and earnings buffers in recent years, and enjoy a predominance of deposit funding—thereby limiting their reliance on capital markets—and benefit from mostly highly supportive governments, the report said.

The report noted that signs of credit distress that first hit China’s wholesale and retail trade, and ex­port-oriented light industry have spread to broad-based manufacturing industries.

Hong Kong and Tai­wanese companies are also feeling pain from their China linkages. Japan’s lagging economic recovery and its central bank’s protracted accommodative monetary stance will likely add to the stress on Japanese banks’ net interest margins.

High household debt in some Asia-Pacific economies have left their banking sys­tems vulnerable to sudden drops in income or to spikes in interest rates, S&P said.

Dislocations in com­modity, currency, property, and interest-rate markets could also adversely affect banks in the region. S&P expects higher loan delin­quencies as the commodities rout continues into 2016.

“We believe most banks will adopt defensive strategies in 2016, focusing on preserving asset quality and minimizing credit losses,” Chugh said.

Asia-Pacific banks cur­rently appear fairly well-pad­ded against recent and future currency deprecia­tions, she added.

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

“The major Asia-Pacific banks we rate have very low net open positions, reflect­ing their general practice of matching their foreign cur­rency assets and liabilities,” Chugh said.

“However, the sec­ond-order impact on asset quality from unhedged debt exposure of corporate bor­rowers could hurt banks,” she added.

Notwithstanding the emerging headwinds from slack growth and dislocations in some markets in Asia-Pa­cific, most banks have stable outlooks, S&P said.