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Press Release
Published December 08, 2016
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Fitch: Asset-quality risks weigh on APAC bank outlooks

Date: December 08, 2016
Categories: asia pac, Industry Outlook, Markets Exchanges, rating
Keywords: APAC, Fitch, Asset-quality, Bank Outlook


Most of Asia-Pacific's (APAC) banking sectors are facing a cyclical deterioration in asset quality in 2017, as a challenging economic environment continues to put pressure on borrowers. Fitch Ratings' 2017 outlook on more than three-quarters of the banking sectors in the region is negative. Earnings and capital buffers are generally strong enough to withstand these trends, but we expect Viability Ratings to remain under pressure in China and India.

There has been a rapid build-up of private-sector debt - corporate and household - in a number of APAC economies since 2009, and the vulnerabilities that this has created will continue be tested in 2017. Fitch expects economic growth in emerging-market (EM) Asia to moderate further to 6.4% in 2017, which is still faster than in other regions but down from an average of 7.8% in 2010-2014. Meanwhile, low commodity prices are still creating financial problems in the resources sector. Other challenges faced by banks include very low, or negative, interest rates and the rapid development of disruptive financial technology ('fintech').

Downside risks have also risen over the last year. China's economy has stabilised, but rapid credit growth is posing a rising threat to basic economic and financial stability. The US election outcome has already led to expectations of higher US interest rates, and a stronger US dollar. Dollar strength would hurt exporters in APAC and make it more difficult for borrowers to service dollar-denominated debts. Meanwhile, president-elect Donald Trump's proposed protectionist policies could disrupt trade, which would be particularly damaging to emerging-Asia's more open economies.

This difficult and uncertain operating environment is likely to translate into further asset-quality deterioration during 2017. We also expect low risk appetite to hold back credit growth, and margin pressures will undermine profit growth. As a result, banking system outlooks have become progressively weaker - we had a negative outlook on less than half of these a year ago.

Fitch expects bank capital levels to generally improve despite negative sector trends. This is partly in response to global regulatory pressures, but also because slow credit growth will aid internal capital generation. Capitalisation and absorption buffers across the region are generally considered comfortable. The main exceptions are the two largest emerging markets - China and India. Capital levels in Mongolia, Vietnam and Sri Lanka also reflect their relatively low ratings.

The outlook on bank ratings is stable in the majority of APAC banking systems. The exceptions are Japan and Sri Lanka - where the negative outlook mirrors our outlook on the sovereign. Sovereign support is still important in APAC, but credible resolution regimes may see support eroded for banks in the region's more advanced financial systems.

Re-disseminated by The Asian Banker