Moody's Investors Service says that the broad credit outlook for banks in the Asia-Pacific region in 2013 is stable on the expectation that they will remain largely insulated from the negative credit pressures affecting their peers in many Western economies.
"We consider that this stable outlook is driven mainly by the region's economic resilience; its relatively accommodative monetary policy; and the banks' own strong liquidity when compared to global norms, as well as their relatively robust capital buffers," says Stephen Long, the Managing Director for Moody's Financial Institutions Group in Asia Pacific.
"For the region, in terms of specifics, we consider that the economic recovery from the troughs reached in mid-2012 will continue in much of the region in 2013. At the same time, interest rates will remain low, making an asset quality shock unlikely during this year in most Asian countries," says Long. "In addition with liquidity, the vast majority of Asian banks are ready to adopt Basel III capital standards, which are being implemented in much of the region in 2013, even though some Asian regulators have announced delays."
Moody's "Asia Pacific Banking Outlook 2013" report examines six key themes for banks in Asia in 2013, including: the expectation that the modest cyclical deterioration apparent, in asset quality should fade by mid-year; the consideration that the region's very low interest rates -- while providing further reassurance that an asset quality shock is unlikely -- are also creating longer-term risks; and the expectation that Chinese banks although will avoid a hard landing, longer-term issues remain unresolved.
In addition, the report argues that Asian banks are well-placed to meet the capital standards of Basel III; the banks will carry on with their overseas expansion, though at a more moderate pace than that evident in 2012; and while the region's regulators will focus on ensuring that new-generation capital instruments meet Basel III requirements, they will still refrain from seeing any urgency in pressing ahead with broader resolution tools that could impose losses on creditors.
In terms of individual banking systems, the report says that with the Chinese banks, the risks of a systemic crisis materializing in 2013 are low. And while loans to real estate developers and to local government financing vehicles (LGFV) will remain sources of long-term asset quality concerns, Moody's sees the risks of significant distress in 2013 as contained, respectively by a recovering real estate sector and the Chinese government's active management of the LGFV refinancing process.
With Japan, the credit conditions for its banks will remain stable despite a generally weak economic outlook. The major banks will continue to take advantage of their relatively strong financial profiles and the retreat of European banks by expanding overseas, both in terms of their loan books and in terms of strategic investments.
For banks in several export-related economies, such as Hong Kong, Singapore, Taiwan, Malaysia, Korea and Thailand, macroeconomic recovery will mean that any cyclical rise in non-performing loans (NPLs) will be modest.
However, tightening liquidity (except for Korea, where Moody's expects loan-to-deposit ratios to continue to decline) will remain a feature as these banks' dollar loan books will keep outstripping deposit gathering in their own currencies.
The outlook for banks in Australia and New Zealand remains stable as these economies continue to exhibit good growth prospects in the near-term, driven by ongoing resources-sector investments in Australia and earthquake reconstruction in New Zealand.
With the positive outlook for the Philippines, Moody's says its banking system will remain relatively immune to global shocks and continue to benefit from steady credit growth. Indonesia shares many of these positive attributes, but Moody's stable system outlook includes more policy uncertainty, as well as greater risk of asset quality pressures due to relatively rapid recent loan growth.
At the other extreme, Vietnam and India have negative outlooks. The Vietnamese system is in much worse shape than India's and there is a reasonably high probability that the government will need to step in and take measures to address the issue of high NPLs, or face the negative economic consequences of a banking system that cannot support credit growth.
And in India, impaired loans are yet to peak among public sector banks. While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained.