MANILA, Philippines – The asset quality of banks in the Association of Southeast Asian Nations (Asean) could weaken over the next 12-18 months. But the banks’ strong performance over the past few years should enable them to absorb the impact.
Standard and Poor’s Rating Services (SandP), in a report titled “Asean Banks Will Remain Resilient To Rising Risks,” said the healthy recurring profits and adequate capital cushions of Asean banks and the strong government support for these banks would underpin rating stability and buffer against downside risks.
SandP’s credit analyst Ivan Tan said in the report that risks have been building up for Asean banks after several years of smooth sailing.
These include credit risk due to rising property prices and household indebtedness, funding pressure from tight liquidity, and market risks from rising interest rates in certain countries.
The analysis focuses on the six key Asean markets: Singapore, Malaysia, Indonesia, Thailand, Philippines, and Vietnam.
Rising property prices amid widely available and affordable credit propelled increase in household debt in Singapore and Malaysia. A prolonged run-up in housing prices and household indebtedness have also contributed to growing economic imbalances.
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However, nonperforming loans (NPLs) in both countries have remained low, reflecting affordable mortgage rates and nearly full employment.
“Some credit weakening is inevitable in Singapore and Malaysia, given the countries’ high household debt, as interest rates start to increase,” Tan said.
“However, a series of measures to cool the property market by the governments in both nations should limit the impact. In Thailand, special-mention loans, which are a leading indicator of future NPLs, have also begun to rise, suggesting the deterioration in asset quality will persist. But we believe Thai banks’ significant reserves provide a countercyclical buffer against downside risks,” it said.
Lingering asset quality issues arising from years of explosive credit growth (of more than 30-percent annually in 2005-2011) and relaxed underwriting standards will continue to weigh on Vietnam’s banking system.
Funding pressure for Indonesian banks will remain high in 2015, but not to the same extent as in 2014.
Indonesian banks’ net interest margins will remain squeezed for at least the next 12-18 months, as competition for deposits remains intense to meet the regulatory loan-to-funding ratio.
Tan said that the days of windfall profits for Philippine banks are over and that trading gains would remain muted this year and into 2016. Rising interest rates would continue to suppress Philippine banks’ gains from fixed-income investments, which account for over a quarter of their total assets.
The rating firm, however, said a “gradual shift” to higher-risk consumer loans driven by competition could tip up the cost of credit, while rising interest rates would pressure banks’ income from fixed-rate government bonds.
Profitability across the local banking sector dipped last year in the absence of phenomenal trading gains seen in 2013, but an expansion in lending propped up net interest income. The share of consumer loans to Philippine banks’ total lending portfolio, however has lagged behind those of its neighbors.
Asean banks have also been building up capital buffers, and are able to comply with more stringent Basel III capital requirements without much difficulty.
Most of the Asean banks have Tier 1 capital ratios of eight to 14 percent, substantially above the regulatory minimum, and are therefore well-placed to face challenges from softer economic growth and uncertainty in the financial markets.
In addition, S and P believes that governments are highly supportive toward their banking system, and will take the necessary steps to preserve financial stability.