Economy News:Fitch Ratings-Hong Kong-20 March 2020: Fitch Ratings has revised the outlook for a further 10 APAC banking systems to negative, meaning that all 17 banking systems in the region are now assessed as having a negative sector outlook. This highlights our expectation that the global coronavirus pandemic will have wide-ranging effects on the region that will adversely affect bank performance in 2020 and into 2021.
The pandemic will affect banks in Asia through multiple channels. The existing challenges to profitability in many markets will be aggravated by recent cuts to interest rates. Weaker economic growth outlooks will dampen demand for credit, and will also contribute to higher credit loss provisions (even if the exposure is not yet impaired) – especially for those banks reporting under IFRS 9. In addition, capital market volatility could deter issuance and listing activity, denting associated revenue streams, as well as causing losses on securities portfolio holdings for some banks.
Official restrictions imposed in numerous markets to curb the spread of the disease will result in a deterioration in bank asset quality. This will initially manifest in domestic markets where banks have exposure to stressed sectors, but also indirectly, for example, through trade channels and higher unemployment. The degree to which individual banks are affected will depend partly on their geographic and sectoral exposures. Further risks for APAC banks will stem from the pandemic’s effects on international funding and liquidity, affecting banks that rely on international financing from wholesale markets.
We had previously noted that banks in some markets had increased their risk appetite in recent years to offset pressures on earnings, and that the potential for associated deterioration in asset quality might not become apparent until operating environments became less benign. The coronavirus looks set to create just such an adverse shift in conditions.
The weakened economic outlook in Asia and in key OECD markets will test the quality of asset exposures outside of banks’ home markets. It could also prompt reassessment of management strategies that involve expanding into higher growth markets with weaker operating environments, or in markets where banks’ competitive positions are weaker than in their domestic market.
Weaker financial performance will add to rating pressure for many Fitch-rated banks, especially where ratings were already on Negative Outlook, including due to sensitivity to medium-term challenges around improving profitability. This includes major banks in Australia (and their New Zealand subsidiaries) and in Japan. However, ratings action is less likely where we assess banks to have sufficient buffers at current rating levels to absorb the deterioration, or where ratings are support-driven. Over half of APAC banks’ Issuer Default Ratings (IDRs) are underpinned by institutional or sovereign support, although the pandemic may also influence the ratings of supporting entities.
We anticipate that there will be more potential for downgrades in standalone viability ratings (VRs) across the region. In China, for example, we now expect that economic growth in 2020 will fall below the 4.2% used by the People’s Bank of China as a severe scenario in its stress tests. Under that scenario, a number of Chinese banks would be falling short of minimum prudential capital requirements. Should those be banks in our rated portfolio, it will result in action on their VRs, even though their IDRs will remain underpinned by state support.
Elsewhere in the region, banks in more volatile or challenged markets, such as Mongolia and India, face heightened negative pressures on their VRs. However, we expect banks in Taiwan and South Korea to be among those better positioned to weather the disruption.