Moody’s warns of emerging risks to Asia lenders

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GLOBAL credit rating agency Moody’s Investors Service on Wednesday warned lenders in the Philippines and other economies in Asia against new challenges and risks that may emerge from potentially tighter global monetary conditions.

“When US interest rates start to gradually rise, the overall resulting tighter global liquidity will lead to higher interest rates in Asia,” Eugene Tarzimanov, vice president and senior credit officer at Moody’s Financial Institutions Group in Asia Pacific, said in a statement.

Despite this, the Moody’s official said the credit profile of banks in Asia will prove resilient to the adverse effects of higher interest rates, such as incurring a somewhat higher number of problem loans, because of their strong internal buffers.

Moody’s pointed out that after the 2008 global financial crisis, Asian banks with the exception of Japan have generally enjoyed a sustained period of positive credit conditions, driven by steady economic growth, moderate inflation rates and increasing regional trade.


Moreover, the ratings firm noted that very low interest rates evident in Asia since 2008 have fuelled rapid credit growth in most Asian economies, and contributed to material rises in property prices in major urban areas.

“As a result of extensive new borrowings by non-financial corporates and households, domestic credit—as a share of GDP—increased to a high 120 percent to 150 percent in many Asian economies at the end of 2013. From an historic perspective, these levels are particularly elevated when compared to around 50 percent to 80 percent in the early 1990s,” it stated.

Furthermore, Moody’s considered that as interest rates gradually rise, a small share of overstretched borrowers in Asia could face difficulties servicing their loans, resulting in somewhat higher problem loans for Asian banks.

Also, the ratings agency said corporate leverage ratios in emerging Asian economies like the Philippines, China, Thailand, India, and Indonesia have deteriorated, leading to Moody’s conclusion that the quality of corporate exposures in emerging Asia may deteriorate to a somewhat greater extent, compared to the more advanced markets whose leverage has been more stable.

Moody’s said that because households in Malaysia and Thailand have borrowed more extensively than households in other Asian markets, their household debt-to-GDP ratios reached 85 percent and 70 percent, respectively, in 2013.

On the property market in Asia, the ratings agency pointed out that prices have either started to decline moderately or have remained stable in the important Singapore and Hong Kong markets, following regulatory actions last year aimed at dampening property prices and deterring speculative transactions.

Moody’s said that these regulatory actions have lowered the risk of abrupt price corrections.

The ratings firm noted that most Asian banking systems are characterized at present by low levels of problem loans, ranging from 0.5 percent in Hong Kong to about 2 percent for banks in Southeast Asia at end-2013.

“As a result, any deterioration in the quality of loan books is starting from a strong base. In addition, their profitability levels are healthy, with average pre-provision incomes to risk-weighted assets of about 3 percent, and net income to risk-weighted assets of about 2 percent,” it said.

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