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Asia-Pacific Banking Set to Remain Mostly Stable in 2023

by internationalbanker

By Hilary Schmidt, International Banker


As the world’s economy continues to experience a sharp slowdown due to the aggressive monetary tightening being administered across much of the globe, the global banking system faces a decidedly cloudy environment going into 2023. The timing for ending interest-rate hikes ultimately rests on when central banks decide inflation has been brought sufficiently under control. But with China and Japan having refrained from hiking rates amid more accommodative monetary environments, it could well be the Asia-Pacific’s (APAC’s) banking sector that leads the way in 2023.

Unlike China and Japan, however, most Asia-Pacific countries have experienced sharp economic slowdowns in recent months, which should support wider net interest margins (NIMs) for banks throughout the region. But loan deterioration looks set to be inescapable as further rate hikes weigh on asset quality. “We expect loan deterioration across Asia-Pacific to be largely moderate, even as support measures unwind,” Fitch Ratings stated. “Relief and forbearance measures may be extended in parts of the region—mainly in EMs [emerging markets]—and loan-provisioning appears sound in most markets. Indian state banks generally have the lowest buffers, though their ratings benefit from assumptions around sovereign support—a common trait among Asia-Pacific EM bank ratings.”

Save for Sri Lanka, which faces pronounced operating headwinds given its recent economic and political turmoil, Fitch sees emerging-market (EM) banking systems in APAC reporting steady (or “mildly better-to-softer”) financial performances in 2023 compared to last year as economies within the region continue to recover and reopen steadily. “Growth in the economy and loans, with benefits to net revenue, will largely offset weakening asset quality in the current interest-rate cycle,” the rating agency noted in late November 2022. “GDP [gross domestic product] growth prospects remain best in Vietnam and India, where loans growth should also exceed nominal GDP growth.”

Many see risks remaining to the downside in EM markets across Asia; higher rates and likely recessions in the United States and the European Union (EU) are also expected to weigh on growth throughout the region. “We expect loan deterioration across APAC to be broadly moderate as support measures unwind. Loan seasoning is unlikely to materialise in 2023 where growth is highest…but relief and forbearance still prevails in parts of the region, while loan-provisioning appears sound in most markets,” Fitch also observed. “That said, Indian state banks have among the lowest buffers. The interest-rate cycle has scope to trigger further mark-to-market losses and weigh on bank financial profiles, although robust credit growth and wider NIMs can offset the impact.”

In more developed markets (DMs) in the region, meanwhile, banking systems will post more “mixed” financial performances, but key metrics in most will be steady or at least maintain a degree of headroom relative to their viability ratings. “We forecast all seven system average common equity tier-1 ratios, a key metric for loss absorption buffers, to remain at broadly similar levels to 2022,” according to a recent Fitch report. “Moreover, we generally expect Asia-Pacific DM banking systems to weather the deteriorating global economic landscape in 2023 better than those in other regions.”

And as far as the region’s biggest economy is concerned, lending is widely expected to expand for Chinese financial institutions this year, particularly as the economic outlook appears brighter now that Beijing is gradually easing its “zero-COVID” rules that weighed heavily on economic growth and business sentiments last year. But the pandemic will continue to pose distinct challenges to Chinese banks in 2023, as will the country’s property markets, which suffered amidst weakening demand and liquidity squeezes that resulted in delays in the completion of several major housing projects.

There will thus be divergences in the performances of Chinese lenders in 2023, with rated banks expected to sustain profitability but write-offs likely to be elevated, Fitch noted. S&P Global Market Intelligence, meanwhile, stated that it sees dividend growth slowing for Chinese banks this year, largely due to “the stringent pandemic policy and its implication on the economy”. S&P forecasted the average dividend growth for the country’s four biggest lenders—the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (AgBank) and Bank of China (BoC)—at an estimated 6.4 percent in full-year 2022, sizeably less than the 11.5 percent recorded for fiscal year (FY) 2021.

Japanese banks should also enjoy stable performances this year, S&P Global Ratings noted in a January 17 forecast, especially given their largely sufficient accumulated levels of capital and low nonperforming loan (NPL) ratios. The rating agency also stated that it holds a favourable base-case forecast for the economy but warned that it might not last due to Japan’s decidedly uncertain inflation outlook. “A rise in interest rates would be basically positive for Japanese banks. This is because we think any possible rise in interest rates, which would reflect inflation in Japan, would likely remain relatively mild,” S&P noted. “However, bank interest income from loans is unlikely to improve much unless short-term interest rates rise. In addition, some banks could be hurt by increasing unrealized losses on available-for-sale (AFS) bonds if interest rates rise.”

Credit costs for Japan’s lenders could also become a concern should interest rates rise to such a degree that they hinder borrowers’ abilities to repay their debts. S&P also observed that while earnings of small and medium-sized enterprises (SMEs) have been supported by temporary government measures introduced during the COVID-19 pandemic, these earnings could deteriorate as such support measures are wound down and removed, possibly impacting banks’ credit costs.

Indian banks, meanwhile, are projected to enjoy strong credit growth, surpassing ₹19 trillion in the current fiscal year. According to domestic rating agency ICRA Limited, these favourable domestic conditions for credit expansion have meant that India’s banking sector’s outlook has been upgraded to positive. “Incremental credit growth in FY2023 is expected to remain at an all-time high of Rs.18.0-19.0 trillion in FY2023, which will be significantly higher than the previous high of Rs. 11.4 trillion in FY2019,” ICRA’s senior vice president and co-group head, Anil Gupta, observed. “Further, the growth momentum is expected to remain strong in FY2024 as well, even though rising interest rates and tight liquidity conditions could moderate the growth.”

ICRA also stated that it expects pressure on the sector’s asset quality to remain scant, thanks largely to the improving performance of India’s corporate sector. As such, gross bad loans are estimated to decline to between 3.9 percent and 4.3 percent by March 2024, while net bad loans will fall to between 1.1 percent and 1.3 percent. “Notwithstanding the ongoing rise in deposit cost and expected moderation in the interest margins, we expect better credit growth and the benign credit cost environment to support the overall profitability of banks,” the rating agency added. “We estimate the return on assets (RoA) and the return on equity (RoE) to improve to 1.2-1.3 percent and 16.1-16.8 percent respectively by FY2024 against 0.9-1.0 percent and 12.9-13.9 percent respectively for FY2023.”

But monetary tightening could well have a considerable impact on Singapore’s biggest lenders, with higher interest rates potentially weighing on the earnings of small and medium-sized businesses. Despite enjoying strong asset quality and profitability in 2022, thanks largely to higher net interest margins (NIMs), and although NIMs may continue to rise this year, the biggest three Singaporean banks—DBS (Development Bank of Singapore Limited), OCBC (Oversea-Chinese Banking Corporation) and UOB (United Overseas Bank Limited)—could see further economic slowdown over the coming months weigh on asset quality and loan growth. “Banks’ gross nonperforming loan ratios could, however, weaken slightly over the next 12 to 18 months because of economic headwinds and increased vulnerability of small and midsize enterprises,” said Ivan Tan, an analyst at S&P Global Ratings. “We have become more circumspect on mainland China and some regional economies to which Singapore banks are exposed.”

Nonetheless, the banks do not see any likely asset deterioration as significant. “We are not seeing signs of systemic stress in asset quality,” UOB’s chief financial officer, Wai Fai Lee, recently told S&P Global Market Intelligence. “Any deterioration is expected to be manageable, with the nonperforming loans ratio to remain comfortably below 2 percent, as we foresee economic activities and the labor market to hold up within the region.” Lee also said he anticipates credit growth to be more subdued than last year’s, with loan-related fees in wholesale lending particularly impacted. Retail-loan growth should remain buoyant, however, largely supported by strong mortgage demand.

 “Among our key assumptions is mid-single-digit loan growth and controlled credit costs,” S&P’s Tan added. “Our base case assumes loan growth of 5 percent to 6 percent over the next 12 to 18 months, with credit costs in the pre-COVID range of 20 basis points to 25 bps.”


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