Fitch Predicts Positively about Potentials of Asia Pacific Banking System

Diep Nguyen

09:41 04/12/2019

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Rising risk appetite is appearing through various channels, but largely related to credit. That said, some banking systems remain highly exposed – or are becoming more exposed – to liquidity risks (China, Vietnam).

Fitch Predicts Positively about Potentials of Asia Pacific Banking System
Fitch’s Sector Outlook: Stable
Fitch Ratings’ 2020 sector outlook for emerging banking systems in Asia-Pacific (APAC) remains stable. The number of negative outlooks on individual systems has fallen slightly, with most central banks shifting course towards looser monetary policy and financial conditions. For those systems where Fitch has a negative sector outlook, Fitch believes any deterioration in key financial metrics will only be moderate in the coming year.
The operating environment remains challenging, yet stable. Fitch downgraded India’s midpoint in 1H19, while China’s midpoint is low relative to the sovereign rating, which Fitch believes captures the degree of systemic risk in those key markets adequately. 
Nevertheless, downside potential looms in most markets – external (eg global growth, macro issues) and internal (eg risk appetite) in origin – which policymakers are warding off through measures to support near-term stability.
Rating Outlook: Stable
The outlook has been mostly stable for several years, and is unlikely to change soon, despite the prospect of weaker financial trends. Over half of APAC Issuer Default Ratings (IDRs) are underpinned by external support (institutional or sovereign), with the outlooks mirroring those of the support-providers, including Vietnam and Thailand where several banks are on positive outlook.
For those banks with IDRs driven by their intrinsic credit profiles (i.e. Viability Rating (VR)) and the outlook is stable, we view their loss-absorption buffers as generally sufficient to weather the likely challenges. Any deterioration in financial metrics is likely to be modest, but we would emphasise the potential for external challenges to expose banks’ levels of risk appetite.
Rating Transition and Distribution
The number of VR downgrades has increased in recent years, but so too have IDR upgrades – for different reasons. VR downgrades have been concentrated mostly in India, where the environment remains challenging, but the state banks’ IDRs remain stable as we believe the state’s propensity to provide support has not diminished. 
Upgrades in China were due to assumptions around support. Otherwise, rating changes have largely followed similar action on sovereign ratings.
Rising Risk Appetite to Offset Pressures on Profitability
Net interest margins (NIMs) and/or overall profitability – even though not bad – have been under pressure for several years, and we expect that to continue in the foreseeable future. In Fitch’s view, most banks have taken on incrementally higher risk (even if only selectively) to stem the pressure.
This is the most significant credit trend that Fitch is focused on, as we expect it to be common to most rating actions – whether negative or holding back positive action – on VRs, in the short term. 
However, the discreet nature of some risk-taking means that it may not become apparent until such time the environment turns for the worse and/or risks crystallise on bank balance sheets. That said, we view banks in Indonesia as generally having among the largest buffers.
Rising risk appetite is appearing through various channels, but largely related to credit. That said, some banking systems remain highly exposed – or are becoming more exposed – to liquidity risks (China, Vietnam). 
Operational risk also remains common to emerging markets. Within credit risk, Fitch sees a greater number of banks shifting down the credit curve (into higher-yielding sectors such as consumer finance and weaker SMEs), which tend to be more vulnerable as the economy softens.
Banks are also raising their exposure to property, both directly and indirectly through non-bank financial entities (although China is somewhat bucking the trend). Meanwhile, Fitch sees competition also having an impact on underwriting standards in other ways, including finer loan pricing and collateral coverage. Moreover, some trends are likely to be perpetuated by policymakers’ efforts to ease the burden on borrowers or stimulate broader credit growth.

DIEP NGUYEN

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