A rise in yields for long-dated sovereign bonds will result in near-term losses for the Asia Pacific (A-Pac) banks as they recognise valuation changes on their available-for-sale (AFS) bond portfolios, according to Fitch Ratings.
But the capital impact should be manageable for most rated banks, it added. Fitch said the capital impact of revaluation adjustments on Indian banks will be modest in 1Q 21, but some public sector banks with thinner capital buffers could face additional capital pressures should yields continue to rise.
Correlation between banks' valuations of AFS securities and changes in domestic yields has historically been strong in some A-Pac markets as gains and losses are marked to market in the quarter they occur.
Fitch said the latest data suggest that banks in Hong Kong, India, Indonesia, Malaysia and Taiwan have the largest AFS securities portfolios and display particular sensitivity to changes in yields.
In Indonesia and Malaysia, for example, AFS revaluation losses were equivalent to 10 to 15 per cent of operating income when yields rose by 50 basis points or more, resulting in a correlation coefficient of nearly 90 per cent during 2012-16.
Yields in Hong Kong, Indonesia and Malaysia have recently risen in line with those in the United States. Fitch said they are likely to remain aligned with potential future increases in US yields in the near term with banks in these systems facing associated portfolio valuation losses.
Revaluation adjustments may be milder for Hong Kong banks which invest heavily in local exchange fund bills. Banks in Taiwan should be more insulated too, partly reflecting surplus domestic liquidity.
Core capital ratios for Fitch-rated banks in Hong Kong, Indonesia and Malaysia remain adequate to absorb minor declines in regulatory capital stemming from yield-driven portfolio revaluations.
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