Sluggish economic growth looms large over region

S&P found that while high-impact stress from China was a low probability, it could hurt many Asia-Pacific banks through their direct and indirect |exposure.
“We expect credit losses of Asia-Pacific banks to rise as growth in major regional economies is likely to slow down,” said S&P credit analyst Geeta Chugh. “China’s slowing economy has also set the stage for increasing credit losses for these banks.”
Standard & Poor’s believes Asia-Pacific banks have a sufficient cushion to absorb higher credit costs. It said the banks had built up sufficient capitalisation and earn?ings buffers in recent years.
They also enjoyed a predominance of deposit funding, thereby limiting their reliance on capital markets, and benefit?ed from mostly highly supportive governments.
S&P notes that the signs of credit dis?tress that first hit China’s wholesale and retail trade and export-oriented light industry had spread to broad-based manufacturing industries.
Hong Kong and Taiwanese companies were also feeling the pain from their linkages to mainland China, while Japan’s lagging economic recovery and its central bank’s protracted accommodative monetary stance would likely add to the stress on its banks’ net interest margins.
S&P said high household debt in some Asia-Pacific economies had left their banking systems vulnerable to |sudden drops in income or to spikes in interest rates.
Thailand was the most exposed, |followed by Malaysia, South Korea and Singapore.
Dislocations in commodity, currency, property and interest rate markets |could also adversely affect banks in the region.
S&P expects higher loan delinquencies as the commodities rout continues.
“We believe most banks will adopt defensive strategies in 2016, focusing on preserving asset quality and minimising credit losses,” Chugh said.
Asia-Pacific banks currently appear fairly well padded against recent and future currency depreciations, Standard & Poor’s said.
The Malaysian ringgit and Indonesian rupiah have been among the worst performers, partly exacerbated by China’s devaluation of the renminbi, or yuan.
“The major Asia-Pacific banks we rate have very low net open positions, reflecting their general practice of matching their foreign-currency assets and liabilities,” Chugh said.
“However, the second-order impact on asset quality from unhedged debt exposure of corporate borrowers could hurt banks.”