After three “stable” years that allowed them to keep lending, economic growth and rising credit costs are taking their toll.
This year will be a turning point for Asia-Pacific banks, at least according to Standard & Poor’s analysts. Multinationals that have successfully diversified or grown their banking relationships in the region may begin to find it harder, or at least more expensive, to borrow.
For the past three years, Asia-Pacific banks have enjoyed high loan growth and moderate credit costs, S&P analysts write in a new report, “Asia-Pacific Banking Outlook: Higher Credit Costs And Lower Earnings Will Test Banks In 2012.” But Europe’s debt crisis, lower regional economic growth, and contraction in some property markets could impair loan quality and push credit costs higher.
“In our view, slower economic growth is likely to impede credit growth and fee-based activities for banks, and this, in turn, could weaken profitability,” writes Standard & Poor’s credit analyst Naoko Nemoto. “Instability in the global financial markets could also hurt Asia-Pacific banks that rely on wholesale funding, and higher funding costs would squeeze net interest margins.”
That said, Nemoto writes that S&P still expects the sector to display adequate capitalization, strong liquidity and low levels of nonperforming loans. “Currently, a majority of our bank ratings fall into the single ‘A’ category or higher, and 80 percent of our outlooks on Asia-Pacific bank group ratings are stable, which reflects our view that most rated banks will be able to withstand the pressure.”
That assumes a base-case scenario where the global economy slows, but avoids a severe recession. However, if there is a prolonged recession, with for example a hard landing in China with growth weaker than the firm’s 7.7-8 percent GDP assumption, S&P could start downgrading the region’s banks.