Asia’s banks in good health (for now), says S&P

A Standard & Poor’s report says Asia’s banking outlook is stable, despite broad challenges.
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China Merchats Bank is one of just three banks in Asia with a positive outlook (ImagineChina)
<div style="text-align: left;"> China Merchats Bank is one of just three banks in Asia with a positive outlook (ImagineChina) </div>

Asia’s banking industry has weathered the financial crisis in good shape, so far, according to an industry report card published by Standard & Poor’s this week.

The rating agency has a stable outlook on 37 of the region’s 40 biggest banks and a positive outlook on the other three — a much healthier situation than in the US, where a third of banks are on negative watch. But Asia’s banks are also facing challenges of their own.

“We do not see smooth sailing for banks in Asia-Pacific, although they have navigated well so far,” said Ryan Tsang, a credit analyst in S&P’s financial services ratings group, during a teleconference with reporters yesterday.

Low interest rates are making it tough to earn decent margins, while over-heating property markets are increasing the risk of a damaging correction and a wave of defaults. At the same time, the threat of inflation remains a persistent worry.

Each of these risks is common to most of the banks in the region, but there are also some specific problems. The report focuses on Asia-Pacific’s biggest financial markets: Australia, China, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore and Taiwan. In two of those countries, Japan and New Zealand, devastating earthquakes have dented economic growth, which is starting to feed into higher rates of bankruptcy, particularly among Japan’s small and medium-size enterprises.

All of Japan’s biggest banks have stable outlooks, according to S&P, but downgrades are a looming possibility. Many of the banks’ manufacturing clients are under strain from constrained suppliers, power shortages and the yen’s strong appreciation, all of which are driving them to move production offshore. And one client in particular, Tepco, has become a money pit.

The company owed ¥2 trillion ($25 billion) to Japanese lenders before the tsunami struck its nuclear facility at Fukushima, and during the panicked aftermath Japanese banks had little choice but to lend Tepco more money as the company could not raise funds in the bond market. Although it clearly enjoys the government’s support, it is still not clear whether the banks will be asked to share some of the pain.

China’s government might make a similar request of its own banks to help pay for the bailout of local government financing vehicles, many of which were bankrupted after funding thousands of stimulus-related projects. But S&P expects the state to shoulder most of the cost, estimated at roughly $400 billion in new non-performing loans, or about 6% of the country’s overall loan book. Even in the unlikely event that the industry had to accept the losses, China’s biggest banks would probably be least affected.

“The pain would not be shared equally,” said Tsang. “Large banks were in a better bargaining position and were able to pick better projects than the smaller institutions, so the state-owned commercial banks are likely to fare better than the average banking sector. We do not see a major rating action because of that.”

S&P predicts the profitability of China’s big banks will weaken for the rest of this year and through 2012, but it does not expect this to threaten ratings. Indeed, all three of the banks with positive outlooks are Chinese: China Construction Bank, China Merchants Bank and Bank of China (Hong Kong).

Elsewhere in the region, the agency has a similar view. Margin pressures in India are expected to increase, but this should be offset by better asset quality. In Korea, the big banks are exposed to heavily indebted household borrowers, real estate project financing loans and the shipping and shipbuilding industries; but S&P says that Korea’s major banks are no longer reliant on short-term foreign currency borrowing and are all currently considered stable.

In Hong Kong and Singapore, the big lenders have increased their loan books at such a rate that it remains to be seen if they can maintain asset quality, particularly as banks in both cities have been busy lending to borrowers in higher-risk neighbouring countries.

“While we will continue to monitor developments, we currently consider the underlying credit risk to be largely mitigated by major banks' risk-management expertise, adequacy of collateral and prudent and proactive regulatory measures,” said S&P in the report.

Taiwanese and Malaysian major banks, while also facing deep challenges, are considered stable. Around the region, the picture is by no means rosy, but for now the risks in the system are manageable, said Tsang.

¬ Haymarket Media Limited. All rights reserved.
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