Moody’s Investors Service expects banks in Association of Southeast Asian Nations (Asean) to remain resilient.
“And with the Asean banks, while we expect them to remain resilient by and large, we note that downside risks are increasing, and these growing risks to economic and financial stability are driving diverging outlooks for the region’s banking systems,” according to Stephen Long, managing director for Moody’s Financial Institutions Group in Asia Pacific.
In terms of continued supports, Long said that Asean banks face expanding markets as domestic wealth continues to rise.
“And they have also been improving their profitability and capital buffers against any weakness in asset quality and liquidity,” he added.
Banks at ‘cyclical peak’
Meanwhile, for Asia Pacific, Moody’s said that despite external uncertainties, banks in the region have likely reached a “cyclical peak.”
Moody’s said that banks in Asia Pacific have been resilient in the wake of the global financial crisis, and enjoy some of the highest ratings of banks globally because of generally strong fundamentals.
The ratings agency noted that Asian banking systems have been operating in a favorable operating environment for an extended period, with low interest rates, robust economic growth and strong loan growth.
“However, during that period, borrowers’ leverage has increased, asset prices have materially appreciated and, in the process, both borrowers and banks may have become more susceptible to asset quality deterioration, especially if the interest rate cycle turns” Long said.
Furthermore, Moody’s said that the increased likelihood of tightening of the United States monetary policy is a potential trigger.
“In this context, Moody’s notes that the exit from loose monetary policies in the developed economies will test Asian banks’ asset quality during the next two to three years,” said Long.
Moody’s also mentioned that there are also other factors more directly emanating from the Asia-Pacific region that will influence the extent to which credit conditions could be pressured.
Among the factors are whether Abenomics in Japan will work as intended, China’s economic rebalancing as well as Asian regulators’ stance with regards to bank resolution regimes.
“And finally, another key question is whether Asia Pacific remains unaffected by the global shift toward burden-sharing in bank resolution,” Long said.