Jan 31, 2011

Fitch: Asia Pacific bank outlook stable

Fitch Ratings said that the ratings outlook for banks in the Asia-Pacific region is stable, in a report published today. The stable outlook reflects the agency's expectations that healthy, albeit slightly slower growth for the region in 2011, would support banks' credit profiles, as would the banks' generally defensive qualities should there be any change in global economic momentum.
Where Fitch has somewhat cautious views are on the banks in China and Vietnam, notwithstanding the broader sector rating Outlook for the former currently being Stable.
This is because their moderating profitability and relentless growth are pressuring capital, thereby weakening their credit profiles; a challenge which is reflected in their low Individual Ratings.
Global investors' interest in Asia-Pacific economies and markets is evident from the sizeable capital inflows, which are raising the risks of inflation and asset bubbles.
Some central banks have already begun tightening monetary and credit conditions in the face of mounting inflationary pressure.
However, a commodities-inflation shock which is more severe than Fitch expects, and/or policy mis-steps that see authorities fall 'behind the curve' of local inflation expectations, could lead to sharper monetary tightening and a downside risk for Fitch's growth forecasts.
Key risks common to the region and its banks are a relapse in the global recovery, and/or a sharp slowdown in China.
In addition to hurting trade, these developments would likely weaken the sentiment-sensitive property sector, and in turn negatively affect banks, given their real estate loan exposures.
Such risk appears highest in Australia, China, Hong Kong and Singapore, where home prices have risen appreciably in recent years, although low interest rates and unemployment levels are mitigating factors for now.
While such adverse conditions would hurt banks' performance, Fitch does not expect widespread negative rating actions to ensue, in light of their generally healthy underlying profitability, provision coverage and high capital ratios.
These factors have helped most of them to emerge from the recent global crisis with their capital bases largely unscathed, enabling them to pursue growth and exhibit good performance.
Some banking systems have seen remarkable growth, such as in China, India, Indonesia and Vietnam.
Fitch believes new capital would help to support the credit profiles of some banks in these high growth systems.
A few banks with weaker deposit franchises in these systems may also face funding pressure, although this is not a concern for most other Asia-Pacific banks, which are largely deposit-funded and do not have excessive loan-to-deposit ratios.
Meanwhile, wholesale funded banks in Australia, New Zealand and South Korea are strengthening their liquidity positions, although lower liquidity in global markets, possibly due to European sovereign debt concerns, remains a threat.
Basel III is unlikely to be too onerous for most Asia-Pacific banks due to their reasonable core capital buffers, modest reliance on hybrid capital, and generally healthy liquidity.
Still, higher buffers are desirable as they support flexibility for growth and instill investor confidence to facilitate future access to funding and capital. 

Disclosure: No position at the stock mentioned above.  

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