• Published on 7 March 2024
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Moody's maintains stable outlook for majority of APAC banking systems

Moody's Ratings has maintained its overall stable outlook on Asia Pacific’s (APAC) banking systems.

The agency has a positive outlook on India’s banking system, and a negative outlook on the banking systems of China; Hong Kong SAR, China; and Korea.

APAC’s uneven operating conditions lead to different asset quality and profitability expectations for the region’s banks. That said, the outlook on most banking systems is stable, supported by APAC banks’ relatively strong solvency and liquidity.

The 13 banking systems with stable outlooks are Australia; Bangladesh; Indonesia; Japan; Malaysia; Mongolia; New Zealand; Pakistan; the Philippines; Singapore; Taiwan, China; Thailand; and Vietnam.

Moody’s expects that the operating environment for banks in India, Indonesia, the Philippines and Taiwan will improve in 2024; deteriorate in Bangladesh, China, Hong Kong and Korea; and be stable for the other banking systems. This divergence is driven by a combination of factors including export demand, domestic consumption, levels of interest rate and inflation, and property market dynamics.

The rating agency’s expectations on policy rate cuts from the second half of 2024 and banks’ high level of loan loss reserves will lead to stable asset quality for most APAC banking systems. For India’s banking system, its improving asset quality will be driven by corporates’ deleveraging efforts and healthy credit metrics, while Mongolia’s banking system’s overall asset quality will also improve due to a rebound in the mining sector.

Meanwhile, Moody’s expects the banking systems of China, Hong Kong, Korea and Vietnam to be pressured by their weak real estate sector. Elsewhere, the problem loan ratio for banks in Australia and New Zealand will increase modestly in 2024 as loans are repriced at higher rates, straining some borrowers’ debt affordability.

At the same time, Moody's expects APAC banks' profitability to remain generally steady as high loan loss reserves and conservative lending standards lead to stable credit costs. However, differences in the timing of policy rate cuts, competitive dynamics, loan rate structure and cyclicality of loan repricing will have varying impact on the banks’ net interest margins (NIMs), although the rating agency does not expect NIMs to drop significantly.

In particular, the profitability of China’s banking system will remain strained by high credit costs and low asset yields, although margin contraction will be smaller than in 2023. And the profitability of Hong Kong’s banking system will be supported by a stable net interest margin, although credit costs will remain elevated for mid-sized banks due to their exposure to China’s property sector. Although Korean banks have put aside a good level of loan loss provisions, increasing competition for loans, subdued commission income and potential regulatory penalties from allegations around mis- selling structured products will pressure profitability.

Meanwhile, the credit costs of Thailand’s and Vietnam’s banking systems will likely remain elevated as banks increase their loan loss coverage. Further afield, the profitability of the banking systems in Australia and New Zealand will be impacted by lower NIMs from intensified competition for loans and deposits as well as higher operating costs. On the other hand, the profitability of Japan’s banking system will benefit from a rising interest rate environment.

APAC banks will maintain strong and stable funding and liquidity, backed by a deposit-based funding structure amid monetary policies that Moody’s expects to become more accommodative from late 2024. Banks’ core capital ratios will remain broadly stable because of muted credit growth and a good level of internal capital generation.

Furthermore, Moody’s expects government support for banks to remain unchanged in most APAC banking systems, supporting banks’ credit ratings. On the other hand, the likelihood of government support for banking systems in China and Hong Kong is lower to reflect the governments’ weaker capacity to support the banking systems, as reflected in Moody’s change in outlook on the sovereign ratings to negative from stable in December 2023.

Re-disseminated by The Asian Banker