Moody's: Asian banks' credit quality stable although credit pressures continue

Moody's Investors Service expects that Asian banks' credit quality will be mostly stable in 2015, even as asset quality weakens and credit costs increase. Most banking systems in the region remain well capitalized and profitable, with some exceptions.

This stable footing will allow Asian banks to withstand increasing credit costs. Moody's anticipates a gradual strengthening in the region's growth momentum as external demand, particularly from a recovering US economy, improves.

"But some Asian banking systems will face adjustment challenges as industrial economies pursue divergent monetary policies in the year ahead," says Stephen Long, a Moody's Managing Director - Financial Institutions Group.

Long pointed to changing monetary policy in key industrial nations such as the US, UK, and mainland Europe, which could affect Asian banks with high leverage and elevated dependence on capital inflows.

"Global liquidity remains generally supportive and, coupled with Asian banks' generally strong loss absorption buffers, and good funding and liquidity profiles, mitigates the risk of disruptive shocks," says Long.

Moody's view is reflected in its bank deposit ratings in Asia, which are on average higher than those in other emerging market regions and in Europe. In addition, 93% of Asian bank ratings have stable or positive outlooks, including reviews for possible upgrade.

"However, our assessment is that Asian banks' credit quality has peaked," says Long. Moody's has a deteriorating asset quality assessment on nine of the regional systems covered by its banking system outlooks.

"Despite the low problem loans most systems currently report, increased corporate, and in some systems increased household leverage, could ramp up credit costs for the banks," notes Long.

In addition, a sharper than expected slowdown in China remains one of the key downside risks for Asian banks, although their current profitability and strong capitalization buffer them from these potentially rising credit costs, says Moody's. In addition, Asian governments will remain broadly supportive of the large banks, and are showing caution in following the lead set in North America and Western Europe of passing more risk of resolving troubled banks to creditors via bail-in regimes.

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