Asia's Banks: Good News From the Front

Moody’s has changed the industry outlooks of the following banking systems from negative to stable: Australia, China, Hong Kong, Indonesia, India, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, and Thailand.

The industry outlooks of the banking systems in Cambodia, Japan, Mongolia and Vietnam remain negative.
Outlooks for industries represent our view on the likely future direction of credit conditions in those industries. They do not represent our projections of rating upgrades versus downgrades.
Three factors underpin the generally better outlook across most of Asia’s banking systems.
  • Improving local economic prospects and stabilizing global conditions
  • Improving access to international debt and money markets
  • Banks are still adequately resilient to cope with remaining macro and micro-economic risks, having suffered only limited damage during the past 30 months of the financial crisis
Those banking systems which continue to carry negative industry outlooks, are also exhibiting some signs of stability, but remain more vulnerable to shocks. Typically these systems were weaker going into the crisis, may have suffered more during the crisis and/or operate in economies experiencing slower recoveries.
Underlying these generally improved outlooks is Moody’s opinion1 that the most likely scenario is that the global recovery will be a sluggish one characterized by growth returning to trend growth rates. Nevertheless, we expect that NPLs will remain above normal throughout much of the region for at least the next 12-18 months. The road to recovery will not be without bumps.
Banking Industry Outlook - Stable
We have changed the Australian banking system outlook to stable as industry conditions are stabilising on the back of an economic outlook that is far more favourable than predicted only six months ago.
Strong demand for commodities from China and an effective government stimulus programme have been important drivers of this outcome. Australia avoided recession in 2009 and the consensus GDP growth outlook for 2010 is in the order of 2.5% to 3.0%. Unemployment is still well contained - at 5.7% in November 2009 - and looks like it has peaked well below the 8.5% originally forecast by the government in mid 2009.
Recent bank disclosures suggest that credit costs are flattening off. Corporate sector leverage is generally low. The commercial real estate sector has successfully raised equity during the crisis and supply/demand conditions remain generally acceptable. While consumer leverage remains high, it has reduced over the crisis period. Housing conditions have remained strong as the supply shortage worsens on continued net migration and limited housing starts. There has been a gain in house prices over the crisis period.
Furthermore, the crisis has supported more sustainable competition by forcing the exit of marginal, price led players. Risk-adjusted returns have improved sharply and have effectively offset the increased funding costs of the crisis period, including retail deposits. Wholesale market conditions continue to improve and investor demand for domestic RMBS is clearly starting to return.


Banking Industry Outlook - Negative
The outlook for the Cambodian banking sector remains negative. The repercussions of the global economic crisis have hampered the country’s garment exports to developed countries, in addition to weakening tourism and construction. The significant impact on the country’s real economy has dragged the banks’ asset quality and thus their earnings since 2Q2009. The system’s NPL ratio rose to around 6% in 2009, from 3.7% in 2008.
Although in 2010 the economy is likely to return to growth from recession, the country’s high reliance on external developments makes its recovery more vulnerable than that of most Asian countries.
Moreover, we expect the banking sector will be beleaguered by a high amount of NPLs for some time, given the excessive credit growth in the several years before the crisis and before the property market bubble burst.
Banking Industry Outlook - Stable
The outlook for the Chinese banking system is stable. Our rating horizon is 12-18 months. We factored into our outlook the fact that the economy is back to high growth, due to the government stimulus policies in 2009.
Inflation and inflated asset prices in certain markets pose risks to banks’ asset quality. But during our rating horizon, we do not expect a crash in the real estate market that would cause a significant deterioration in loan quality. In addition, regulators have been taking active steps to manage excess liquidity to mitigate the risks of inflation and formation of an asset bubble.
We expect liquidity to remain readily available in the banking system, especially as most bank loans will not come due in the next 18 months. However, banks may face challenges in dealing with a potential rise in non-performing loans when a large proportion of loans begin to mature in 2011.
Unless the global and Chinese economies are again suffering significantly slower growth at the time, we believe that the banks will be well positioned to restructure or provision loans as necessary against larger balance sheets and earnings.
Banking Industry Outlook - Stable
We have changed the outlook for Hong Kong’s banking system to stable. There have recently been more signs pointing to an encouraging operating environment for the banks in Hong Kong over the next 12 to 18 months.


  • The global economy continues to recover gradually.
  • The Chinese Government is tightening its monetary policy, which improves chances that bank credits will grow at a more sustainable, healthy rate. A solid Chinese economy is important to the banks in Hong Kong given the growing integration between the economic systems in mainland China and Hong Kong. In addition, our recent conversations with the banks in Hong Kong have convinced us that there are more developments which help alleviate most of our worries.
  • With growing confidence in the operating environment, the banks are carefully increasing their risk appetite in lending and their treasury operation. We believe this will allow the banks to enjoy better profitability without taking too much additional risk, optimizing the risk and return profile.
  • Banks are going to increase staff training, enhancing their own due diligence on investment products, and, perhaps most importantly, ensuring a good match between customer needs and investment product features. We believe this will both avoid the reputation and financial damage of another Lehman minibond fiasco, and facilitate a recovery in wealth management income over the medium to long term.
Downside risks remain, but due to strong financial profiles, crisis-test management teams, and a stringent regulatory regime, there is not a long list of factors which may cause serious damage to the banks.
However, as an open economy which emphasizes highly cyclical industries, Hong Kong is certainly exposed to global economic shocks, which may adversely affect the banks. Hong Kong is in particular vulnerable to inflationary risk, given that its monetary policy cannot be used totally freely to contain inflation with the Hong Kong dollar pegging against the US dollar.
Banking Industry Outlook - Stable
Moody’s changed the fundamental credit outlook for the Indian banking system to stable from negative that was assigned in January 2009, reflecting the favourable trends in India’s economic indicators over the last few months.
India’s July-September 2009 (Q2 FY2010) data were stronger than expectations, and higher than 5.8% in the previous two quarters, pointing to a 7.9% year-on-year GDP growth and suggesting a sustainable recovery in economic activity. As a result the Indian economy may grow at around 7% in the current fiscal year ending March 2010 (FY2010) backed by buoyant industry growth and an upside in agriculture output.
This implies a more favourable outlook for credit growth and the banking system as a whole, which has been facing significant asset quality challenges with higher loan delinquency rates over the last few quarters.
The Indian economy and its credit cycle seem to have bottomed out and as a result we expect any credit cost pressures for the banks to ease going forward, although the volume of non-performing and restructured loans is not expected to come down significantly over the short-term.
We believe that the management and the future performance of all those restructured loans in the banking system, estimated at about 4.5% of total loans, will drive the credit risk profile as well as the evolution of the Indian rated banks’ financial fundamentals over the short-to-medium term.
Banking Industry Outlook - Stable
We have changed the industry outlook to stable from negative. In hindsight, we were overly pessimistic about the potential impact of the global crisis on Indonesia’s banking system.
Although the Indonesian banks did face increased pressure - particularly with regard to asset quality and tighter liquidity, which culminated in intense competition for deposits in late 2008 – their creditworthiness proved relatively resilient.
Over the next 12 months, earnings growth should accelerate as economic conditions improve. This will be fuelled by stronger loan growth and a recovery in net interest margins as the cost of funds normalizes.
The interest rate cycle is likely to be on a rising trend due to higher inflation. In Moody’s opinion, however, the banks will manage, as the system has traditionally coped with high levels of interest rates. Moreover, this situation will benefit banks that hold substantial amounts of floating-rate loans and government bonds.
On balance, liquidity concerns will remain benign given the moderate system loan-to-deposit ratio of 74%, the banks’ substantial government bond holdings and the system’s reliance on Indonesian rupiah-denominated deposits for funding.
As for asset quality, the non-performing loan ratio declined to 3.82% in November 2009 from the recent peak of 4.14% in May 2009. Overall, asset quality and credit costs will be contained in the more favourable operating environment.
Finally, capital levels have held up – as the banks were sheltered from risky global investments by regulatory restrictions – which allow for future expansion. As of November 2009, the capital adequacy ratio was 17.08%.
Banking Industry Outlook - Negative
We maintain a negative outlook on Japan's banking system, despite continuing improvement of fundamentals in 2009. The major reasons are that the operating environment for Japan's banks will continue to be characterised by:
  • the onset of deflation,
  • very weak credit growth and employment figures,
  • a still volatile equity market, and
  • limited growth opportunities inside domestic markets.
We expect all of these factors will continue to pressure Japanese banks’ performances for the next year.


Banking Industry Outlook - Stable
We have revised our outlook on the Korean banking system to stable from negative, as Korea’s favourable economic growth prospects for the next few years should help banks recover their profitability, as well as pre-provision and net earnings.
The rise in market interest rates will enhance the banks’ net interest margins, as their asset duration is shorter than their liability duration. And favourable economic growth will help the banks gradually lower their credit costs.
Two risk mitigating factors could arise should the global economy decline significantly from our central scenario for a sluggish recovery: the domestic banks’ improved external debt position and the government’s ability to provide additional economic stimulus.
The domestic banks had cut their external debt to U$102.4 billion as of September 2009 from U$126.5 billion at June 2008, and have made progress in terming out their external debt maturities since mid-2009. We believe that the government can provide additional economic stimulus if necessary, given its current deficit and debt levels.
However, an unexpected fall in China’s growth dynamic could hurt Korea’s macro economy, given its dependence on exports for economic growth.
Banking Industry Outlook - Stable
We have revised the industry outlook for Malaysian banks from negative to stable. Their prospects -- over the next 12 to 18 months -- have improved from 2008-2009 due to better economic conditions.
The government’s stimulus measures, low interest rates and the gradually stabilizing global economy have helped, although fiscal consolidation and contentious domestic politics will need to be addressed to enhance long-term economic fundamentals.
Our sovereign team projects Malaysia’s real GDP to grow 4.3% in 2010, after it shrank an estimated 2.5% in 2009. This will be a good result, but still below the 2004-2008 average of 5.7%.
Barring further economic shocks, the liquid and well-capitalized banks are favourably positioned to increase lending. Fee income from better capital market and wealth management opportunities and manageable provisions should support overall profitability, considering the highly competitive nature of the lending business.
However, there are risks which could test the banks, such as the uneven and fragile recovery of the advanced economies and disorderly exits from high-stimulus policies. On a more optimistic note, healthy levels of loan loss reserves and capital offer reasonable protection for Malaysian banks against further financial stress.
Banking Industry Outlook - Negative
Our outlook for Mongolia’s banking system remains negative reflecting our expectation of continued weakness in the real economy during our rating horizon of 12-18 months. Industrial production in October 2009 dropped sharply from a year earlier, continuing its downward trend since mid-2009.
Deflation and high real interest rates on both loans and deposits are very high -- the real borrowing cost to be over 20% -- suppressing loan demand. But the conclusion of the Oyu Tolgoi agreement on a major mining project will help with local economy and loan demand in 2010.
The banking system also remains weak as loan quality continues to deteriorate, especially for loans to the private sector. Excluding the two failed banks, past due loans and non-performing loans were over 17% of total gross loans as of November 2009.
Consequently, we expect banks’ profit margin to remain under pressure in the coming year. In addition, liquidity remains tight as loan-to-deposit ratio reached a high of 120% as of November 2009, though MNT deposits continue to increase in recent months.
Recent irregularities at two failed banks also highlight the perils in the operating environment and the weakness in banks' overall risk positioning, including poor corporate governance, deficiency in controls and risk management, lack of transparency, and high risk concentrations to individual clients.
The Bank of Mongolia has implemented a range of banking sector reforms, including a key measure to complete the audits of most banks by internationally reputable firms. However, the effectiveness of these measures remains to be seen.
Banking Industry Outlook - Stable
The change in outlook to stable from negative for the New Zealand banking industry reflects the country's steady recovery from its mild recession between Jan 2008-March 2009.
Improved economic factors such as two consecutive positive quarters of GDP growth and lower revised unemployment forecasts should ease asset quality concerns. Real GDP is expected to grow by 3% in 2010.
The dramatic monetary policy action taken by the RBNZ during the crisis, cutting official interest rates from their recent high of 8.25% (in June 2008) to its current 2.50%, was designed to stimulate the economy. Encouragingly, the RBNZ recently announcing it may start to remove monetary stimulus around mid-2010, earlier than the previous timeframe of end-2010, should economic conditions continue to improve.
Whilst we feel non-performing loan (NPL) rates may have peaked, we will continue to closely monitor these levels in coming months, as some exposures may become delinquent over time. Borrower concentrations still exist, particularly in the property sector, where development has slowed and final completion or settlement has been delayed due to factors such as a fall in market value.

However, the recovery in 2010 of dairy prices will ease farm cash flow pressures, leading to a greater portion of performing loans.

The major banks still have significant funding wholesale requirements, at around 40% of total funding.
With the New Zealand government guarantee for wholesale funding still in place, the New Zealand banks have continued to utilize both the government guaranteed and non-government guaranteed markets. The four majors are also well under way to meet new RBNZ liquidity policy requirements, scheduled to be in place by April 2010.
Banking Industry Outlook - Stable
Improved economic conditions underpin the change in the Philippine banks’ industry outlook from negative to stable. We expect domestic consumption, helped by robust remittances, a better export outlook, and election spending -- against a backdrop of stabilizing global conditions -- to benefit the banking industry over the next 12 to 18 months.
Some “political noise” could emerge in an election year, but is not expected to cause excessive instability. Our sovereign team projects the country’s real GDP to grow 3% in 2010, much better than an estimated 1% in 2009, but below the 2004 to 2008 average of 5.7%.
The better economic outlook will support earnings in two ways. Firstly, loan demand should increase. Secondly, higher interest rates should benefit the banks’ margins as their loans typically re-price faster than deposits.
These factors should moderate the effects of competition and a potential hike in typhoon-related provisions. The Philippines was hit by a number of typhoons toward the end of 3Q2009. Barring significant shocks, we expect the banks’ loan-loss reserves, capital and earnings prospects to offer reasonable creditor protection over the next 12 to 18 months.
Banking Industry Outlook - Stable
The outlook for the Singaporean banking sector has been revised to stable from negative. The change mainly reflects expectations of a more favourable operating environment in the coming 12 to 18 months along with the economic recovery. In 2009, Singapore’s GDP contracted by around 2%. For 2010, Moody’s forecasts 5% growth.
With economic growth, more sustainable loan demand and lower loan loss provisions should follow. Moreover, rising interest rates could benefit Singaporean banks’ net interest margins. As a result, we expect bank asset quality and earnings to gradually improve and return to more normalized levels.


Banking Industry Outlook - Stable
The change in Taiwan’s banking system outlook to stable is driven mainly by the improving operating environment, stabilizing asset quality, and improving profitability.
A gradual economic recovery will set the stage for better prospects for the banks, with Taiwan’s GDP growth forecast at 4% for 2010. Exports have also rebounded in the past several months thanks to strong orders from China. Therefore, Taiwan banks’ asset quality of the banks in Taiwan is stabilizing.
The NPL ratio for all the domestic banks peaked at 1.63% in March 2009, a marginal increase compared to 1.53% in September 2008, and declined further, to 1.29% in November 2009.
Moody’s also expects pre-provision profits to rise. Net interest margin, which bottomed between 2Q and 3Q of 2009, are recovering as time deposits were re-priced. Wealth management income, is also improving, given the more favourable sentiment in the equity market and the return of consumer confidence. However, we believe that profitability will improve only moderately as interest rates will likely increase slowly in order to support economic growth.
Throughout the financial crisis, liquidity has been strong in Taiwan. Funding will not be an issue for most of the banks, given the industry’s average loan-to-deposit ratio of around 75% and limited loan growth. In addition, the domestic money market and bond market have been in good order, providing banks with the avenues to raise capital.
Several risks remain in the banking system. First, net income of the Taiwanese banks could decline, as they will likely need to set aside more loan loss provisions in order to meet the more stringent accounting standard that will become effective in 2011. At this time, however, the actual impact to the banks remains uncertain given that specific regulations are not yet available.
Second, single borrower and industry concentration remains one of the biggest credit weaknesses. We may see a sudden spike in NPLs, but this will be due to isolated cases.
Banking Industry Outlook - Stable
We have changed our fundamental credit outlook for the Thai banking system to stable from negative, reflecting the favourable overall credit conditions in the country. However, the sector's resilience and ability to absorb the adverse effects of the global financial crisis could be fractured by the country’s fragile political environment.
Nevertheless, Moody's believes that the banking sector will benefit from the Thai government's continued commitment to supporting the economy with an expansionary budget and stimulus program. We expect the economy to grow 3-5% in 2010 after a contraction of 3% in 2009. We also expect credit growth of 5-10% in 2010, after a contraction of 2% in 2009.
The impact of the financial crisis has been limited, as the Thai banks do not depend significantly on market funding. Moreover, asset quality has been stable since end-2008, with most banks reporting a decline in NPL ratios, which are targeted to fall to 5% from 5.5% at end-2009. The rated banks' profitability indicators also remain strong, despite pressure, and are in fact commensurate with those of higher rated banks in other markets.
Capitalization metrics do not indicate any imminent threats to the banking system's solvency, ensuring some stability amid the more volatile operating environment.
Banking Industry Outlook - Negative
Moody’s maintains its negative outlook for Vietnamese banking due to the still unstable economic conditions in the country. The current macroeconomic imbalances put downward pressure on the Vietnamese exchange rate as the government tries to balance pro-growth with stabilization policies.
This coupled with re-emerging inflationary expectations create uncertainty and instability in the operating environment that the Vietnamese banks operate in.
Moody’s notes that the government stimulus and limited global integration reduced the impact of the global financial crisis on Vietnam. Its GDP grew 5.3% in 2009, contrary to the contractions recorded by its regional neighbours, and the economy is expected to grow by 5.7% in 2010.
Its banking sector has also been resilient thus far. However, past rapid credit growth is likely to continue and pose challenges for banks' risk management, asset quality, and capitalization, whilst liquidity is tightening from satisfactory levels. In addition, the credit fundamentals of the Vietnamese banks remain compromised by a weak legal system, poor governance, and limited transparency.