2017 outlook on AsiaPac banks negative – Moody’s

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PH assessed as stable in earlier report

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Debt watcher Moody’s Investors Service said it has a negative overall outlook for banks in Asia Pacific for 2017, given the challenging operating conditions in the region that are bound to weigh on the banks’ asset quality and profitability.

Earlier, Moody’s said in a separate assessment that Philippine banks have a more stable outlook due to the government’s capacity to support the industry in times of stress.

In its just-released outlook titled “Banks—Asia Pacific: 2017 Outlook—Negative Amid Asset Quality and Profitability Challenges, however, Moody’s named six countries that carried negative outlooks, out of the 16 in the region that are in the scope of its analyses: Australia, China, Hong Kong, Korea, Mongolia and Singapore.

The Philippines is among 10 systems for which the credit rating agency has stable outlooks, the nine others being India, Indonesia, Japan, Malaysia, New Zealand, Sri Lanka, Taiwan, Thailand, and Vietnam—all of which “reflect the banks’ greater resilience against higher solvency risks.”

Emerging risks

Problem assets will rise from a generally low level, Moody’s warned, citing previous rapid credit expansion, elevated corporate and household leverage in some economies, the ongoing recognition of credit problems, and challenges in commodities and cyclical industries.

Foreign private capital flows will remain volatile in emerging Asia, pressuring domestic currencies and weakening operating conditions for the banks, it said, adding that property price increases in parts of Asia Pacific will further amplify credit risk for the banks.

In addition, the report said banks’ generally strong profitability will continue to be pressured by higher credit costs.

Mitigating factors

Nevertheless, Moody’s pointed out that despite the overall negative outlook, downside risks for the banks are partly balanced by the banks’ improving capital levels, as well as their strong funding and liquidity profiles.

Corporate leverage affecting the banks’ asset quality remains generally elevated in Asia Pacific, it said.

While the pace of debt accumulation has slowed in many markets – which Moody’s sees as indicative of early deleveraging efforts – the elevated levels of debt will test the banks’ asset quality, as some firms struggle with weak cash flows and high debt levels, it said.

Referring to Chinese banks in particular, Moody’s said the banks will continue to face credit challenges because their operating environment will stay challenging, reflecting the country’s slower economic growth, an increase in corporate sector restructuring, and rising concerns over elevated asset prices in some areas.

As for government support for the banks, it said such support will stay high, because regulators in Asia Pacific are not keen to embrace wider bail-in measures. It cited Hong Kong as the only exception in the region, with ongoing progress toward an operational resolution regime.

Addressing the issue of emerging risks and opportunities, the agency said green bond issuance by banks in Asia Pacific is set to increase further. Competition posed by financial technology firms will improve the banks’ development and delivery of financial services, it pointed out.

PH outlook

Earlier, Moody’s released an assessment of the Philippine banking outlook, saying their prospects are better, with the government’s capacity to support banks in times of stress.

In that report released in October, the credit rater pointed out that the Philippine government’s capacity to provide support to banks in times of stress improved in recent years because of strong economic growth and improvements in fiscal management.

However, it also said risks were emerging amid increasing exposure to real estate-related loans and higher-yielding small and medium enterprises (SMEs).

Moody’s said loans to the real estate sector—both commercial and residential—have grown by an average of 19 percent annually since 2008, and represented 23 percent of banks’ total loans at end-June 2016 compared with just 15 percent at the end of 2008.

It warned that given the increasing dominance of this sector, which could leave banks vulnerable to a decline in property prices, banks’ exposure to the corporate and SME sectors—which together represent 66.5 percent of banks’ gross loans—should remain broadly stable, supported by robust macroeconomic factors.

Last week, another credit rating agency, Fitch Ratings also issued a stable outlook on most Philippine banks for 2017, citing growth drivers which continue to sustain credit demand.

In its report, Fitch said it expected domestic demand to remain strong, fueled by sustained remittance inflows and business process outsourcing revenue, as well as favorable demographics and continued capital investment needs despite a tepid global economy.

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