APAC banks' credit intact during downturn

A new report from Moody’s Investors Service says that despite substantial risks, Asia-Pacific banks’ creditworthiness should remain largely intact through the current economic downturn.

“We expect banks’ asset quality to deteriorate significantly as economic conditions remain weak, while their profitability will take a hit from rising credit costs and declining margins,” says Eugene Tarzimanov, a Moody’s vice president and senior credit officer.

The rating agency expects problem loans will double on average across the 14 APAC economies by 2022, with banks in India and Thailand seeing the largest increases due to the severity of the economic shocks and the historically poor performance of certain loan types.

Meanwhile, rising credit costs and a 5-10 percent drop in pre-provision income amid falling interest rates will drive a significant deterioration in profitability in coming years.

 “In line with weak operating conditions, we expect capital ratios will decline at 78 percent of the 218 rated APAC banks by the end of 2022 from the end of 2019,” Tarzimanov said.

 “However, the decline at most rated banks will not be significant enough to prompt a change in our views on fundamental creditworthiness, which also take into account other factors such as profitability, asset quality, funding and liquidity.”