Debt watcher Moody’s Investors Service sees rising credit risk from commodity sector lending among Asia Pacific banks, but said that banks in the Philippines will be among the ‘least affected’, due to their low exposure to these kinds of loans.
Moody’s analysis is contained in its just-released report on banks in Asia Pacific (excluding Japan) entitled, “Commodity Exposure Will Add to Asset Quality and Profitability Pressure,” authored by Eugene Tarzimanov, a Moody’s vice president and senior credit officer.
“The least affected will be banks in Hong Kong, Australia, Taiwan and the Philippines, because of either the banks’ low exposure to the energy/commodity sectors, the low reliance of these economies on commodities exports, or both,” the report stated.
Moody’s showed that the loan exposure to borrowers in commodity-related industries in the banking system of these economies was below 5 percent.
Meanwhile, the credit rater said other banks in Asia Pacific show moderate loan exposure to borrowers in commodity-related industries, with such loans making up about 7 percent of gross loans on average at end-2015.
However, the quality of such loans will likely continue to deteriorate, based on Moody’s assessment that energy and commodity prices will remain low over a prolonged period, it stressed.
“In Asia Pacific (ex-Japan), the riskiest exposure for banks in terms of energy and other commodity loans originate from metals and mining, as well as from certain parts of the oil and gas sector, including services, offshore marine and shipping and shipbuilders,” Tarzimanov said.
“In general, we do not expect negative bank rating actions related to commodity exposures, because banks in Asia Pacific have either good financial buffers, moderate commodity exposures, or ratings that already capture asset quality weakness,” Tarzimanov added.
The report said that based on Moody’s expectation that commodity prices will stay low for a prolonged period, corporate earnings will be negatively affected; thereby weakening the debt repayment capacity of many commodity firms, and creating pressure on or delaying the recovery of asset quality and profitability for the banks in Asia Pacific.
Moody’s noted that the pressure on the quality of commodity-related loans could lead to possible negative bank rating actions in Singapore, Korea and Mongolia over the next 12 months to 18 months, as reflected in Moody’s negative outlooks on many banks in these economies.
The report said that for oil and gas and related industries such as shipping and ship and rig building, banks in Singapore and Korea are more exposed when compared with other banks in Asia Pacific. In Singapore and Korea, the exposure is about 5 percent of gross loans.
As for the metals and mining sector, banks most exposed to these sectors are in Mongolia (10 percent of gross loans), India (7 percent, including steel), Indonesia (around 5 percent) and China (about 4 percent).
The global metals and mining sector has been under stress for many years and some Asia Pacific banks demonstrate large legacy problem loans in this industry, it noted.
On the issue of agriculture-related exposures, Moody’s does not expect a material weakening in the banks’ asset quality, because global agriculture prices have shown better performance relative to energy and metals prices.
Moody’s pointed out that banks most exposed to agriculture are in New Zealand (14 percent of gross loans), India (13 percent), and Thailand (about 6 percent).
The report said that overall, banks in Asia Pacific demonstrate good buffers against rising credit risks, despite the likely continued pressure on the quality of their commodity portfolios.
Such buffers include their generally low problem loan ratios and problem loan coverage above 80 percent for more than half of Asia Pacific banking systems.
Banks in Asia Pacific—except for banks in Vietnam and public sector banks in India—also show good capital buffers and profitability, providing a good line of defense against rising problem loans, it concluded.