Bangkok--7 Sep--Fitch Ratings
Fitch has today published a review of the results for the first half of 2009 for major banking systems in Asia ex-Japan and has found a consistent theme - results have in almost all cases come in better than expected at the start of the year when Asian economies faced the prospect of very severe recessions. The first half results suggest that asset quality has deteriorated, but not as rapidly as seemed likely just a few months ago, with the result that the decline in net profitability has also been less steep than Fitch analysts had anticipated and none of the banking systems covered had fallen into net losses. While cautioning that bad loans will continue to emerge over the next year even as economies stabilise, the agency attributes most of this resilience to the soundness of Asian banks going into the downturn, and the external nature of the economic shock that hit Asia, in contrast to the collapse of credit-fuelled asset bubbles that occurred in some western economies whose aftermath is almost invariably far more damaging to banks.
In China, surging loan growth in H109 has considerably eroded banks' pricing power, weighing on net interest margins and eroding capital ratios. Performance is expected to improve in H209 as credit growth slows, but is likely to remain low relative to prior years. Over the short term, NPL ratios are likely to be kept in check by the denominator effect of strong loan growth, as well as weaknesses in loan classification that result in delayed recognition of NPLs. However, Fitch is increasingly concerned about the medium-term asset quality outlook for Chinese banks given the corporate-heavy orientation of recent lending amid contracting enterprise profits.
"Although headline asset quality indicators improved almost across the board in H109, we remain very concerned about a potential spike in bad loans over the medium term, particularly if corporate profits remain under strain," says Fitch Senior Director Charlene Chu.
In Korea, the agency believes that the banks will maintain adequate capitalisation while the bottom line profitability will remain weak for the next several quarters given an elevated but still manageable level of credit costs. It notes that the most difficult time for Korea's banks in funding foreign currency has passed.
Ambreesh Srivastava, Senior Director, Financial Institutions sees a similar trend for banks in most South East Asian countries, where the deterioration in asset quality has been significantly better than Fitch's expectations as of H109. "The findings of the agency's Stress Tests on ASEAN banks reveal that barring a handful, most banks should still generate adequate earnings to absorb a 'stressed' level of credit costs, and the risk of capital impairment therefore appears low. Together with their already high core Tier 1 capital buffer, most banks' ratings Outlook is Stable. However, a few banks in the Philippines and Vietnam appear more vulnerable in this challenging environment, and may face downward rating action unless their capital positions are strengthened," comments Mr. Srivastava.
Fitch analysts also find other reasons why NPLs have remained low. Mr. Srivastava points out that Indian banks' reported NPL ratios have also remained low, but this has partly been due to the large scale restructuring of loans since October 2008; these loans are not classified as non-performing as per local regulatory norms. Based on the agency's stress tests, where delinquencies are assumed to be significantly higher, including on restructured loans, the better-rated banks come out with satisfactory loss absorption ability, and hence the Rating Outlooks on them are still Stable. That said, most Indian banks' International ratings are closely linked with that of the sovereign (Long-term foreign currency IDR: 'BBB-'/Stable Outlook; Long-term local currency IDR: 'BBB-'/Negative Outlook), and would likely move in tandem with India's foreign currency rating.
"Thai banks' H109 results indicate that despite a significant decline in GDP of over 4% their performances so far appear resilient, although there is still a risk of a rise in provisioning in the next six to 12 months. While reported NPLs have risen modestly to an average of 8% (end-2008: 7%), special mention loans for most banks have doubled in the past year indicating rising asset quality pressures," says Vincent Milton, Senior Director, Financial Institutions. The agency believes that strong Tier 1 capital ratios of 11% and high profit margins for most Thai banks should provide a solid cushion if economic conditions remain weak into 2010.
"Banks in Asia (Excluding Japan): Outlook for H209" is available on the agency's website, www.fitchratings.com.
Contacts: David Marshall, Singapore, +65 6796 7211/ [email protected]; Charlene Chu, Beijing, +134 3978 8798/[email protected]
Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214, Email: [email protected]; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: [email protected].
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.