Moody's: Banking systems in Asia Pacific show stable outlook, but challenges apparent

China and India are most exposed to high corporate leverage risks

Moody's Investors Service says that the banking systems in Asia Pacific overall show a stable outlook for 2018, but challenges are apparent in terms of long-term risks related to the high level of private-sector leverage.

"Solvency metrics will be stable in most of the banking systems rated by Moody's in Asia Pacific, driven by a synchronized global recovery and moderate credit growth", says Eugene Tarzimanov, a Vice President and Senior Credit Officer for Moody's Financial Institutions Group.

"Furthermore, bank funding and liquidity will remain strong, while most governments will maintain their supportive stance towards the banks, with a low likelihood that senior creditors will be required to bail-in banks," adds Tarzimanov.

Of the 16 banking systems discussed, two have positive outlooks, one negative and the remaining 13 stable.

Support for banks' asset quality comes from the steady global and regional economic recovery, as well as largely stable commodity prices, while problem loan ratios are steadying and problem loan coverage is generally strong.

In addition, capital buffers have improved due to moderate growth in risk weighted assets and more stringent regulatory requirements, and profitability at the banks will be broadly stable in 2018.

Funding and liquidity also remain a strength, and Asian banks are mostly deposit-funded with liquid balance sheets, while their reliance on wholesale funding is moderate. Meanwhile, banks in Australia and New Zealand -- which rely more heavily on wholesale funding -- have shown tangible improvements since 2008.

However, the high level of private-sector leverage -- both corporate and household -- remains a medium-term risk but will not spill over into bank balance sheets in 2018.

In this context, China and India are most exposed to high corporate leverage risks, while Australia, New Zealand and Korea are most exposed to household-related risks.

Furthermore, real estate price appreciation is spurring housing loan growth and is linked to a rise in household leverage.

Finally, Moody's expects that governments in the region will remain supportive of the banks, which provides uplift for senior unsecured and deposit ratings, and most economies are unwilling to introduce burden sharing through statutory bail-in for senior creditors. In Asia Pacific, the exception is Hong Kong, where the authorities have introduced a statutory bail-in regime that subjects senior unsecured creditors and uninsured depositors to the risk of burden sharing.

Asia Pacific banks are also facing several secular trends. For example, rapid digitization of personal finances brings not only opportunities but also risks to the banks -- particularly as related to new entrants such as financial technology firms. Another trend is rapid population aging in some markets, which in the long run may undermine the banks' strong deposit-focused funding bases.

The systems with stable outlooks in the advanced economies are Australia, Hong Kong, Singapore, Japan, New Zealand, Korea and Taiwan; and for the emerging and developing economies, China, India, Malaysia, Thailand, the Philippines and Mongolia. Indonesia and Vietnam have positive outlooks, and Sri Lanka negative.

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