Major banks in Asia (excluding Japan) major banks performed better than expected in the first half of 2009, according to Fitch Ratings' review of the region’s major banking systems. The agency rates as 'stable' both most banks' outlook and already high core Tier 1 capital buffer.
Fitch’s review of the first half results suggests that, while asset quality has deteriorated, the decline has not been as rapid as expected just a few months ago. The decline in net profitability has also been less steep than Fitch analysts had anticipated. None of the banking systems covered had fallen into net losses.
The agency attributes most of this resilience to the soundness of Asian banks going into the downturn, and the external nature of the economic shock that hit Asia. But Fitch warns that that bad loans will continue to emerge over the next year even as economies stabilise.
In China, surging loan growth in the first half of the year has considerably eroded banks' pricing power, weighing on net interest margins and eroding capital ratios. Performance is expected to improve in the second half of the year as credit growth slows, but is likely to remain low relative to prior years.
Over the short term, non-performing loan (NPL) ratios are likely to be kept in check by the denominator effect of strong loan growth, as well as weaknesses in loan classification that result in delayed recognition of NPLs.
However, Fitch is increasingly concerned about the medium-term asset quality outlook for Chinese banks given the corporate-heavy orientation of recent lending amid contracting enterprise profits.
Over in Korea, the agency believes that the banks will maintain adequate capitalisation while the bottom line profitability will remain weak for the next several quarters because of an elevated, but still manageable, level of credit costs. Fitch notes that Korea's banks are now over their recent difficulty in foreign currency funding.
Ambreesh Srivastava, Senior Director, Financial Institutions, sees a similar trend for banks in most Southeast Asian countries, where the deterioration in asset quality has been significantly better than Fitch's expectations.
Srivastava notes that most banks should still generate adequate earnings to absorb a 'stressed' level of credit costs, and the risk of capital impairment therefore appears low.