The operating environment in many ASEAN countries is turning increasingly negative, which may pose downside risks to bank ratings, says Fitch Ratings.
Rapid credit growth and abnormally low interest rates have supported south and south-east Asian bank performance in a benign domestic credit environment over the last four to five years despite a difficult global economic backdrop.
However, this has led to a combination of higher leverage and asset-price inflation, with household debt in particular, rising sharply in some ASEAN countries including Malaysia, Thailand and Singapore.
The risks have been manageable thus far, but could become a source of asset-quality problems should unemployment begin to rise and interest rates normalise.
Uncertainties surrounding the Chinese macroeconomic outlook are also a key point of risk for ASEAN banking systems, given the increased trade and financial linkages between south-east Asia and China.
Singaporean banks, in particular, face increasing risks related to their direct exposures to China.
Even for the majority of ASEAN banks, which have only limited direct exposures, the high level of macroeconomic linkages points to challenges should Chinese growth slow.
Stable outlooks only on Singapore, Malaysia and the Philippines
It is notable that five of the eight country banking sectors that Fitch assesses in south/south-east Asia are on negative outlook - the ratings agency has stable outlooks only on Singapore, Malaysia and the Philippines.
However, strong loss-absorption buffers - and in particular high levels of core capital - mitigate such risks for many ASEAN banks, and hence the rating outlook for most banks is stable.
In Thailand, the ongoing political uncertainty poses risks to economic stability. For now, the major Thai banks look resilient and remain on stable outlook. However, if a process for stabilisation is not in place in early 2H14, then this may cause a reassessment of our bank ratings.
The Indonesian economy and banks experienced considerable pressure in 2H13, linked to interest-rate hikes and pressure on the rupiah.
The economy has since stabilized, however a slower domestic economy indicates that asset quality and profitability pressures could yet rise.
The rating outlook for most major banks is stable despite the sector as a whole being on negative outlook, thanks to the banks' strong profitability and loss-absorbing capacity.