Mumbai: International rating agency Moody’s Investor Services, on Tuesday, said that its outlook for banks in the Asia-Pacific region remains negative for next year. The rating agency believes that the difficult operating environment, in the 16 banking systems of the region, is likely to affect the asset quality and profitability of banks here, it said in a report.
“Problem assets will rise from a generally low level, due to previous rapid credit expansion, elevated corporate and household leverage in some economies, the ongoing recognition of credit problems, and challenges in commodities and cyclical industries,” Stephen Long, a Moody’s managing director, said in a statement.
“Foreign private capital flows will remain volatile in emerging Asia, pressuring domestic currencies and weakening operating conditions for the banks,” added Long. “And, property price increases in parts of Asia Pacific will further amplify credit risk for the banks.”
Of the 16 banking systems in Asia-Pacific that Moody’s analyzed, six carry negative outlooks as compared with three in early 2016. The stable outlooks for the remaining 10 systems reflect the banks’ greater resilience against higher solvency risks, Moody’s said.
As far Indian banks go, Moody’s has a stable outlook across parameters such as capital, asset quality, operating environment funding and liquidity, profitability and efficiency and government support.
“We expect uneven economic growth in APAC, with risks skewed to the downside; most economies growing at lower rates than their long-term averages,” the rating agency said in its report.
“GDP (gross domestic product) growth slowdown is most pronounced for small and open economies such as Taiwan, Singapore and Hong Kong. By contrast, Australia, India, New Zealand and Vietnam are more resilient,” Moody’s added.
Indian banks do however display one of the highest non-performing asset (NPA) ratio in corporate loans at nearly 9.5%, second only to Mongolia’s 12.5%, the report noted. In a sensitivity test where the EBITDA falls by 25% and the funding costs rise by 25%, Indian companies would prove to be some of the weakest ones in the region, with Japanese firms being the strongest, the rating agency said.
As a share of total gross loans, Indian banks have one of the highest exposures to the metals and mining sector, which means that their profitability is deeply impacted by any adverse developments in those sectors. Mongolian and Indonesian banks are some other lenders with similar conditions, Moody’s said in its report.
As for government support for the banks, Moody’s said such support will stay high, because regulators in Asia-Pacific are not keen to embrace wider bail-in measures. Hong Kong is the only exception in the region, with ongoing progress towards an operational resolution regime.