Asia Pacific banks headed for darker skies in 2019

The World Bank in its January 2019 Global Economic Prospects report, ominously subtitled “Darkening Skies”, warned that “financial market pressures and trade tensions could escalate, denting confidence and further setting back growth prospects in emerging market and developing countries”. This year, global economic growth is expected to slow further in a majority of advanced economies and in about a third of emerging market and developing economies. In all, global growth is predicted to moderate from 3% in 2018 to 2.9% in 2019 and an average of 2.8% in 2020-21.

Macroeconomic conditions in the Asia Pacific region appear to be more challenged too. Banks in the region are preparing to exit the extraordinarily long period of benign credit cycle in the past decade, aided by easy liquidity. Potential deterioration in credit conditions exacerbated by higher interest rates in the US and volatile domestic currencies pave way for more difficult financing situations in 2019. High debt and high asset prices fuelled by the past excesses of cheap lending pose additional risks, should there be a sharp correction in asset prices and withdrawal of market liquidity.

Although most banks are well capitalised and pose strong balance sheets to weather any economic shocks, the region reflects an array of banking risks. Strong growth of debt, particularly household debts in Australia, South Korea, Malaysia, New Zealand, Singapore and Thailand and property market-downturn related risks in jurisdictions of China and Hong Kong are of particular concern. Resolution of non-performing loans (NPLs) and recapitalisation of systemically important public sector banks (PSBs) in India whereas the ongoing trade skirmish between US and China could erode corporate profitability and asset quality of Chinese banks. For Japanese banks, the negative interest rate policy (NIRP) is yet to translate into higher lending and increased profitability.

Advanced, East Asian and European economies to slow while most emerging market and developing economies in Middle East, Africa, Latin America and South Asia will grow in the year ahead

Figure 1.  Gross domestic product growth (in %)

Conditions will be more challenged and unpredictable in the year ahead. There are still many unknowns on the geo-political front, continued and potentially more fraught relationships between US and China; Russia; and even traditional allies in EU and NATO members. The unresolved state of Brexit negotiation would no doubt cause further disruptions to global markets as companies and businesses are forced to weigh and come to final resolution on their long-term presence in the UK and Europe.

Notwithstanding the looming dark clouds and headwinds, the majority of Asia Pacific banks continue to be well capitalised and liquid to weather the uncertain conditions ahead, and may even benefit from any unexpected silver linings that may emerge given the sheer unpredictability of the geo-eco-political realities that exist now.