Indian banks will get more resilient despite bad debt: Moody's

The reason why most Asia-Pacific banks have stable outlook is the strength of their loss-absorbing buffers

Growth in Indian banking system, which has been under pressure in recent years, will be more resilient, Moody's Investors Service today said.

"Slower GDP growth is most pronounced for small and open economies such as Taiwan, Singapore and Hong Kong. In contrast, growth in India and Vietnam banking systems that have been under pressure will be more resilient," the rating agency said in a report on Asia-Pacific banks, titled '2016 Outlook Stable, But Risks Will Rise'.

Out of 16 banking systems in the Asia-Pacific for which Moody's has an outlook in place, 13 have stable and three -- China, Hong Kong and Mongolia -- have negative.

According to Moody's, the operating environment is becoming more challenging in most Asia-Pacific banking systems as the banks feel the impact of subdued global growth, which in turn is exacerbated by weaker demand in China.

The investors service noted that despite the pressure on asset quality, the major reason why most Asia-Pacific banks have stable outlook is the strength of their loss-absorbing buffers.

The investors service predicted that as the credit cycle turns, corporate credit metrics will likely weaken, potentially leading to higher corporate 'problem' loans.

"The share of debt owed by vulnerable companies is highest in India, Sri Lanka, Korea and China," Moody's noted.

It said the outlook for banks in the Asia-Pacific is generally stable in 2016, but for many of the region's banking systems, asset quality and profitability would worsen.

"This deterioration is explained by our expectation of slower GDP growth in the Asia-Pacific, potential further pressure on currencies and high levels of corporate and household debt in some countries," said Stephen Long, Managing Director for Moody's Financial Institutions Group in the Asia Pacific.

"Bank ratings will remain broadly stable because of good capital levels as well as strong funding and liquidity profiles, as most systems are deposit funded, but the risk for ratings are skewed to the downside in the event of an economic slowdown in the region that is sharper than expected."

Long said he expects real GDP growth in the Asia-Pacific of 4.5 per cent in 2016 unchanged, but below the 4.8 per cent recorded in 2014 mainly because of the slowdown in China.