2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic

Prospects
Primary Credit Analyst: Naoko Nemoto, Tokyo (81) 3-4550-8720; naoko.nemoto@standardandpoors.com Secondary Contacts: Ritesh Maheshwari, Singapore (65) 6239-6308; ritesh.maheshwari@standardandpoors.com Ryan Tsang, CFA, Hong Kong (852) 2533-3532; ryan.tsang@standardandpoors.com Peter Sikora, Melbourne (61) 3-9631-2094; peter.sikora@standardandpoors.com Geeta Chugh, Mumbai (91) 22-3342-1910; geeta.chugh@standardandpoors.com Andy Chang, CFA, FRM, Taipei (8862) 8722-5815; andy.chang@taiwanratings.com.tw Kiyoko Ohora, Tokyo (81) 3-4550-8704; kiyoko.ohora@standardandpoors.com Sharad Jain, Melbourne (61) 3-9631-2077; sharad.jain@standardandpoors.com

Table Of Contents
Economic Headwinds Loom In Australia, New Zealand, India, And Malaysia Banks In China And Hong Kong Face Risks From Rising Property Prices Structural Reform Still Lacking In Japan; Indonesia Vulnerable To U.S. Policy Changes Negative Rating Actions Unlikely To Increase In 2014 Regional Financial Institutions Face Same Risks As Major Banks Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 1

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects
Asia-Pacific financial institutions may face more hurdles in 2014 as pressure on the economic front is likely to bear down on their asset quality, in Standard & Poor's Ratings Services' view. Although we see GDP growth in the Asia-Pacific region moderately improving to 5.4% from 5.3% in 2013, growth prospects in emerging countries such as China and India have weakened. Going against past trends, Asia-Pacific financial institutions are now more exposed to local/regional risks than external risks. In our view, the following stand out as potential risks: high private-sector indebtedness in many Asian countries, meager economic outcomes from the region's policies, a disorderly market reaction to the U.S. tapering off its quantitative easing, and the eurozone debt problem. We hold the view that China's slower growth could have spillover effects on other countries such as Australia, Indonesia, Taiwan, Korea, and Hong Kong. Sluggish economic conditions, combined with a high level of corporate and household debt in some major economies will stress banks' asset quality. Generally, we expect credit costs to rise. Nevertheless, we are unlikely to see a sharp increase hurting banks' capitalization, assuming the region will benefit from a gradual global economic recovery under our base-case scenario. Overview Asia-Pacific financial institutions may face more hurdles in 2014 and pressure is likely to build on their asset quality. Growth prospects in emerging countries such as China and India have weakened, while private-sector leverage and property prices are rising in many countries. Financial institutions will be exposed to several risks such as high private-sector indebtedness in many Asian countries, meager economic outcomes from the region's policies, a disorderly market reaction to the U.S. tapering off its quantitative easing, and the eurozone debt problem. In some countries such as Malaysia, Thailand, Korea, and Singapore rising household indebtedness is contributing to growing economic imbalances and could hurt banks' credit profiles. Despite existing pressure on the asset quality of Asia-Pacific banks, we do not foresee an increase in the number of negative rating actions in 2014. We believe that adequate capitalization, good liquidity, and solid government support will underpin our ratings on Asia-Pacific banks.

Compared with other regions, the credit standing of the Asia-Pacific banking sector has been characterized with resilience. Except for Thailand, we did not change the BICRA group scores of the countries during 2013. However, we expect downward pressure to weigh on many countries' BICRA scores. We have seen an increasing number of negative economic trends and negative changes in the BICRA subscores. We lowered our BICRA on Thailand to group '6' from group '5' due to a rise in the country's private-sector and household debt, which could worsen "economic imbalances" in Thailand (for more details, please see "Credit FAQ: What Revising Our BICRA Score For Thailand Means For Its Banks," published Dec. 6, 2013). We use our BICRA methodology to identify and incorporate rising and

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 2

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects

receding risks for banks consistently and globally. BICRA determines the anchor rating for all banks in the system, which is the starting point in assigning an issuer credit rating. In Asia-Pacific, our BICRA scores range from group '2', which we consider as low risk, to group '9', which we consider as high-risk (see tables 1a and 1b and chart 1).
Table 1a

Asia-Pacific Banking Industry Trends

BICRA Group Economic resilience Australia China India Indonesia Japan Malaysia Thailand Korea 2 5 5 7 2 4 6 3 Very Low risk Intermediate risk High risk Very High risk Low risk High risk High risk Intermediate risk Economic Risk Factors Economic imbalances Intermediate risk High risk Low risk Intermediate risk Low risk Low risk Intermediate risk Low risk Credit risk in the economy Low risk High risk High risk Very high risk Low risk High risk Very high risk High risk Economic risk score 2 6 5 7 2 5 7 4 Economic risk trend Negative Stable Negative Stable Stable Negative Stable Stable

Note: BICRA Group '1' to '10', from lowest to highest risk. Economic and Industry risk classified as "very low," "low," "intermediate," "high," "very high," or "extremely high." For information about other Asia-Pacific nations, please see Banking Industry Country Risk Assessment Update: MONTH YEAR.

Table 1b

Asia-Pacific Banking Industry Trends

BICRA Group Institutional framework Australia China India Indonesia Japan Malaysia Thailand Korea 2 5 5 7 2 4 6 3 Very low risk High risk High risk Very high risk Intermediate risk Intermediate risk Intermediate risk Intermediate risk Industry Risk Factors Competitive dynamics Very low risk High risk High risk High risk Intermediate risk Intermediate risk High risk Intermediate risk Systemwide funding Intermediate risk Very low risk Low risk Intermediate risk Very low risk Low risk Low risk Low risk Industry risk score 2 5 5 7 3 3 5 3 Industry risk trend Stable Stable Stable Positive Stable Stable Stable Stable

Note: BICRA Group '1' to '10', from lowest to highest risk. Economic and Industry risk classified as "very low," "low," "intermediate," "high," "very high," or "extremely high." For information about other Asia-Pacific nations, please see Banking Industry Country Risk Assessment Update: MONTH YEAR.

Except for Australia, New Zealand, India, and Malaysia, we view the economic risk trends in all other countries in the region as stable. On the other hand, we assess the economic risk trends in many eurozone countries as negative (see chart 1). As for industry risk trend, we assess Indonesia as positive, because it has improved bank regulations and supervision, while we assess other Asia-Pacific countries as stable. In March 2013, we began to assign "positive," "stable," and "negative" qualifiers to the trends that we observe in the economic and industry risks to better capture emerging risks (for more details, please see "S&P To Publish Economic And Industry Risk Trends For Banks,"

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 3

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects

published March 12, 2013).

Economic Headwinds Loom In Australia, New Zealand, India, And Malaysia

We view the economic and industry risk trends in Australia and New Zealand as negative, reflecting the potential risk of low interest rates reigniting property prices in their housing markets, which are showing signs of a resurgence. We believe that these risks are heightened by the high external imbalances in both countries, particularly against the backdrop of a weak global economic recovery and a less buoyant economic outlook for China--a major trade partner for the two countries. In India, economic resilience could deteriorate if the country's medium-term economic growth prospects dim while large government deficits limit their ability to stimulate growth through public expenditure. We expect pressure on credit risk and asset quality, which are being undermined by higher interest rates and a falling rupee, to cause credit costs to remain at high levels in 2014.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 4

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects

In our view, a prolonged run-up in housing prices and household indebtedness in Malaysia are contributing to growing economic imbalances. The pace of Malaysian property price increases has gathered momentum in recent years. We believe there is growing potential for deterioration of Malaysian banks' credit profiles associated with a turn in the credit cycle. In November, Standard & Poor's revised the outlooks on four Malaysian financial institutions to negative from stable to reflect growing economic imbalances in Malaysia (for more details, please see "Credit FAQ: Whats Behind Our Negative Outlooks On Four Malaysian Banks," published Nov. 27, 2013). Our assessments of economic and industry risk trends in other Asia-Pacific banking systems are stable. However, we also hold the view that economic imbalances--in particular, higher credit growth and hikes in property prices--could escalate economic risks. In our view, rising household debt, which some observers have said are fueled by easy monetary conditions in the global market, pose risks to the banking system in many countries, including Singapore and Korea. As for Thailand, we revised our economic risk score to group '6' from group '5', which led to the revision of our anchor SACP for a bank operating in Thailand. The banking industry has been growing aggressively over the last three years, outpacing nominal GDP by a wide margin. With leverage for both the household and corporate sectors remaining high, we believe banks are exposed to high credit risks in a slowing economy.

Banks In China And Hong Kong Face Risks From Rising Property Prices
In addition, high property prices in Hong Kong and China are leading to poor housing affordability, which can undermine the credit quality of mortgages. In our opinion, the credit profiles of banks in Malaysia and Thailand are the most vulnerable to deterioration in the health of their respective household segments due to the rapid growth of household debt, contained income levels, and higher exposure to riskier loans (for more details, please see "Rising Household Debt Could Weigh Down Asias Banks," published Oct. 28, 2013). In our opinion, a severe economic downturn leading to a rise in unemployment (of 2%) and fall in property prices (of 30%) in sensitive countries such as Hong Kong, China, Korea, Malaysia, and Thailand would increase credit costs and harm banks' capitalization. Under this scenario, we could consider lowering ratings. At this moment, however, we believe the probability of this scenario is low considering the region's potential growth and relatively sound fiscal balance, which could support flexibility of policy measures. The region's governments have taken preemptive steps such as lowering loan-to-value (LTV) ratios to rein in excessive investment. In China, we expect the banking sector's loan quality and profitability to slip further in 2014. Banks remain heavily exposed to lackluster export growth, debt-laden local government financial platforms, and many manufacturers saddled with oversupply, such as steelmakers and shipbuilders. Specifically, we believe inevitable consolidation in these manufacturing segments could pose the biggest threat to Chinese banks' loan quality next year. In addition, if authorities' efforts to rein in a rapidly growing shadow banking sector--including trust companies and loan sharks among others--are unsuccessful, the sector's risk could spread to other parts of the economy, in our opinion. Nevertheless, our views about banking industry risks in China, whose BICRA is group '5', already incorporate a high degree of risk and volatility (for more details, please see "Banking Risks Are Slowly Receding In Much Of The World, But Watch Out For The Hot Spots," published Oct. 2, 2013).

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 5

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects

Structural Reform Still Lacking In Japan; Indonesia Vulnerable To U.S. Policy Changes
Our view of the economic and industry risk trends for Japanese banks is stable. This reflects what we see as a reasonable possibility that measures by the government to defeat deflation and boost economic growth will support banks' credit profiles over the short to medium term. However, without structural reforms such as deregulation of traditional industries, measures to enhance the mobility of its labor market, and consolidation of large government deficits, we believe the improvement won't stick. Japanese banks are still heavily exposed to industries that are struggling to improve their core revenues. In particular, regional banks are facing a decline in their core business due to a shrinking population and many manufacturing industries relocating their operations overseas. Half of the 28 rated banks with negative rating outlooks mostly reflect the negative sovereign outlook. Among Asia-Pacific countries, Indonesia is most vulnerable to U.S. monetary policy changes, which could impact currency and interest rates. The Indonesian central bank has lifted its policy rates since June 2013 to address capital outflow and inflation. Lower economic growth and higher interest rates will adversely affect banks' asset quality. We lowered the economic imbalances risk score for Indonesia to "intermediate risk" from "low risk" in September 2013. We believe the banking industry risk in Indonesia, whose BICRA is group '7', already incorporates the vulnerability arising from capital outflow under our base-case assumptions.

Negative Rating Actions Unlikely To Increase In 2014

We believe "systemwide funding," which is one of our analytical components for industry risk, will continue to be an area of relative strength for the region. We assess nine out of 18 systems as "very low risk" or "low risk." This reflects the region's high savings rate and stable core deposit base. Banks in Australia, New Zealand, and Korea are relatively more dependent on wholesale funding, which is exposed to global market conditions and market reaction to the end of the third phase of quantitative easing (QE3) in the U.S. Nevertheless, we do not expect these banks to encounter significant difficulties as they have increased their loan tenors and core deposits in the past few years, and the fundamentals of the economies in these countries remain resilient. Despite existing pressure on the asset quality of Asia-Pacific banks, we do not foresee an increase in the number of negative rating actions in 2014. Most of the major banks have enhanced their capitalization under stable operating conditions in the past few years. We believe that adequate capitalization, good liquidity, and solid government support will underpin our ratings on Asia Pacific banks.

Regional Financial Institutions Face Same Risks As Major Banks

Nevertheless, large banks face key risks including worsening asset quality triggered by slower economic growth. A hard landing in China, the eurozone debt crisis, and a global economic slowdown could also be risk factors. In addition, gains and sharp declines in property prices, as well as failure or delays in the implementation of effective macroeconomic policies, could pose risks in many countries, in our opinion. Meanwhile, easing monetary conditions

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 6

1225824 | 300510290

2014 Asia-Pacific Financial Institutions Outlook: Rising Private-Sector Leverage May Overshadow Banks' Performance Amid Softer Economic Prospects

will constrain banks' loan margins. On the other hand, an expected change in U.S. monetary policy in 2014 could trigger interest rate hikes in global and local markets, and capital outflow could pose some challenges for debt-laden corporate and household sectors. Despite these sensitivities, nonperforming loans remain relatively low compared to late 2010. Adequate capital and good funding will continue to sustain the credit standings of Asia-Pacific major banks, in our opinion. Regional banks and finance companies face the same risks as the large banks. However, for the regional banks, structural weakness and concentration risk are additional risk factors as economic conditions in their home provinces are, in many cases, more sluggish than those at the national level. At the same time, the finance companies in some countries must grapple with high household debt, less resilient funding conditions, and growing pressure on their loan margins.

Related Criteria And Research

Related Criteria
Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

Related Research
Credit FAQ: What Revising Our BICRA Score For Thailand Means For Its Banks, Dec. 6, 2013 Credit FAQ: Whats Behind Our Negative Outlooks On Four Malaysian Banks, Nov. 27, 2013 Rising Household Debt Could Weigh Down Asias Banks, Oct. 28, 2013 Banking Risks Are Slowly Receding In Much Of The World, But Watch Out For The Hot Spots, Oct. 2, 2013

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 7

1225824 | 300510290

Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 10, 2013 8

1225824 | 300510290