Loan growth in most parts of the ASEAN region has steadily outpaced deposit inflows over the past several years, leading banks to use most of their stock of deposits to fund loans.
Moody's Investors Service says that ASEAN banks will increasingly turn to capital markets, particularly by issuing bonds, in order to fund their lending operations.
In addition, some banks have turned to their excess liquid assets as an alternative source of funds, a source Moody's believes is also diminishing.
"Going forward, we expect that further growth will also be driven by funding needs, rather than solely by choice. Therefore, funding and liquidity will increasingly become factors that differentiate ASEAN banks' credit profiles," adds Anbarasu.
According to Moody's, outstanding bonds and borrowings (excluding interbank loans) by rated ASEAN banks increased by 71% to USD168 billion at end-2013 from USD98 billion at end-2009. This was in part driven by opportunistic market tapping at a time when credit spreads were low and investors' appetite for ASEAN bank debt was growing.
Loan-to-deposit ratios (LDRs) rose to around 90% at most ASEAN banks at end-2013 from the low 80%-range at end-2009.
Indonesian banks appear the most stretched, particularly in local-currency funding. Banks in Thailand and Vietnam have some of the highest foreign-currency LDRs, indicating elevated foreign-currency funding needs.
Banks in Singapore and Malaysia also have increasing foreign-currency funding requirements, owing to their active pursuit of intra-regional expansion.
On the other hand, banks in the Philippines continue to have very strong funding cushions, and liquidity is unlikely to become a constraining factor for their credit profiles in the next few years.
Moody's expects loan growth to remain robust in the mid teens in percentage terms, supported by continued infrastructure spending and working capital needs; increasing penetration of banking services, particularly in Indonesia and the Philippines; and cross-border loan demand due to regional expansion by ASEAN corporates and greater demand for trade finance.
While banks have been able to fund part of their credit growth by converting liquid assets into loans, this flexibility will reduce in the future, as banks have to keep minimum liquidity buffers.
In Indonesia, Malaysia and Singapore, local regulators require banks to maintain minimum amounts of highly liquid assets to meet Basel III liquidity ratios by 2015 and 2016.
While the same rules have not yet been introduced in the Philippines, the regulator has already required banks to maintain high reserves of 20%.
Moody's expects that banks able to diversify their funding sources and maturity profiles, while hedging foreign currency liabilities and maintaining larger buffers of liquid assets, will protect and perhaps even improve their credit profiles.
Conversely, banks that need to rely heavily on short-term market funds that increase asset-liability maturity mismatches could see their creditworthiness weaken.