Bangkok--3 Feb--Fitch Ratings
Assessing the outlook for Asian banks, Fitch has today said that it notes that the operating environment for the region's banks strengthened unexpectedly fast in H209, shifting concerns away from potential bad loans arising from severe recessions to concerns over asset price bubbles.
In its latest annual Asian banking Outlook, the agency views "bubble risk" as greatest for Chinese banks given their 32% loan growth in 2009; this looks likely to be followed by a further 20% in 2010. Fitch notes that credit growth of more than 50% over a two-year period in an economy where bank credit is already quite large relative to GDP almost inevitably involves some misallocation of credit. Neverthless, it notes that the limited transparency of Chinese banks and their tendency to reschedule loans means that any resulting bad debt problems will be slow to surface, and that the Chinese authorities should have the time and the resources to deal with any banking sector problems that may emerge. Fitch notes that Chinese banks are less well-placed, compared with Asian peers, to deal with potential problems given that rapid loan growth is weakening capital ratios that are already relatively low. This has led to the downgrades of certain banks' Individual Ratings that assess bank's stand-alone financial strength.
Fitch also expects to see monetary tightening in India, accompanied by some costs arising from the slightly delayed recognition of asset quality problems. Higher interest rates are likely to squeeze interest margins and moderate gains on their investment portfolios, which together with higher loan loss provisioning requirements are likely to result in a dip in net profitability ratios for Indian banks in 2010.
In most other Asian banking systems in 2010, Fitch expects to see banking sector profits recovering from crisis-induced declines - these were sharpest in Taiwan and Korea, significant in Hong Kong (where the cost of the Lehman mini-bond issue was material to banks), and more limited in Singapore and Malaysia. Banks in Thailand, Indonesia and the Philippines are estimated to have actually performed better in 2009 than in 2008. With GDP growth forecast to be in the range of 4%-5% for most of these countries in 2010, the outlook appears reasonably favorable for banks to sustain their performance. Fitch sees the major risks as arising from external economic shocks, such as renewed weakness in the developed world, or if China's credit-fuelled growth hits a speed bump.
Fitch views regulatory risk as more limited for Asia (versus banks in developed countries), since stronger capital and liquidity requirements, which global regulators are focusing on as key measures to strengthen bank soundness, have long been features of most Asian systems; exceptions include Korean banks' liquidity risks which regulators have attempted to address. Loan loss provisioning norms continue to be tightened around the region, affecting India and Taiwan in 2010, and higher levels of capital would help mitigate some of the risks in high growth systems such as China.
The agency observes that the implementation in Asia of a "Volcker" rule to remove high risk activities from banks, such as proprietary trading, would have a minimal impact on most Asian banks as they have not moved far from a traditional model of fairly simple banking products focused on servicing clients.
The report, entitled "Banks in Asia (Excluding Japan): "Outlook for 2010" is available from Fitch's website, www.fitchratings.com.
Applicable Criteria available at www.fitchratings.com: "Global Financial Institutions Rating Criteria", dated 29 December 2009.
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