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Report-Asia BSO Jan2010
Report-Asia BSO Jan2010
Report-Asia BSO Jan2010
1
Sovereign Risk Analysis Group on January 11, 2010 published an update to our Global Risk Scenarios in a report entitled “Global Macro-risk Scenarios 2010-2011 – On
the “Hook” for Some Time Yet”.
GLOBAL BANKING
AUSTRALIA
Recent bank disclosures suggest that credit costs are flattening off. Corporate sector leverage is
generally low. The commercial real estate sector has successfully raised equity during the crisis and
supply/demand conditions remain generally acceptable. While consumer leverage remains high, it has
reduced over the crisis period. Housing conditions have remained strong as the supply shortage
worsens on continued net migration and limited housing starts. There has been a gain in house prices
over the crisis period.
Furthermore, the crisis has supported more sustainable competition by forcing the exit of marginal,
price led players. Risk-adjusted returns have improved sharply and have effectively offset the increased
funding costs of the crisis period, including retail deposits. Wholesale market conditions continue to
improve and investor demand for domestic RMBS is clearly starting to return.
CAMBODIA
Although in 2010 the economy is likely to return to growth from recession, the country’s high reliance
on external developments makes its recovery more vulnerable than that of most Asian countries.
Moreover, we expect the banking sector will be beleaguered by a high amount of NPLs for some time,
given the excessive credit growth in the several years before the crisis and before the property market
bubble burst.
2 JANUARY 2010 SPECIAL COMMENT: ASIAN BANKING SYSTEM INDUSTRY OUTLOOKS: 12 SYSTEMS MOVE TO STABLE FROM NEGATIVE
GLOBAL BANKING
CHINA
We expect liquidity to remain readily available in the banking system, especially as most bank loans
will not come due in the next 18 months. However, banks may face challenges in dealing with a
potential rise in non-performing loans when a large proportion of loans begin to mature in 2011.
However, unless the global and Chinese economies are again suffering significantly slower growth at
the time, we believe that the banks will be well positioned to restructure or provision loans as necessary
against larger balance sheets and earnings.
HONG KONG
» With growing confidence in the operating environment, the banks are carefully increasing their
risk appetite in lending and their treasury operation. We believe this will allow the banks to enjoy
better profitability without taking too much additional risk, optimizing the risk and return profile.
» Banks are going to increase staff training, enhancing their own due diligence on investment
products, and, perhaps most importantly, ensuring a good match between customer needs and
investment product features. We believe this will both avoid the reputation and financial damage
3 JANUARY 2010 SPECIAL COMMENT: ASIAN BANKING SYSTEM INDUSTRY OUTLOOKS: 12 SYSTEMS MOVE TO STABLE FROM NEGATIVE
GLOBAL BANKING
of another Lehman minibond fiasco, and facilitate a recovery in wealth management income over
the medium to long term.
Downside risks remain, but due to strong financial profiles, crisis-test management teams, and a
stringent regulatory regime, there is not a long list of factors which may cause serious damage to the
banks. However, as an open economy which emphasizes highly cyclical industries, Hong Kong is
certainly exposed to global economic shocks, which may adversely affect the banks. Hong Kong is in
particular vulnerable to inflationary risk, given that its monetary policy cannot be used totally freely to
contain inflation with the Hong Kong dollar pegging against the US dollar.
INDIA
This implies a more favorable outlook for credit growth and the banking system as a whole, which has
been facing significant asset quality challenges with higher loan delinquency rates over the last few
quarters. The Indian economy and its credit cycle seem to have bottomed out and as a result we expect
any credit cost pressures for the banks to ease going forward, although the volume of non-performing
and restructured loans is not expected to come down significantly over the short-term. We believe that
the management and the future performance of all those restructured loans in the banking system,
estimated at about 4.5% of total loans, will drive the credit risk profile as well as the evolution of the
Indian rated banks’ financial fundamentals over the short-to-medium term.
INDONESIA
4 JANUARY 2010 SPECIAL COMMENT: ASIAN BANKING SYSTEM INDUSTRY OUTLOOKS: 12 SYSTEMS MOVE TO STABLE FROM NEGATIVE
GLOBAL BANKING
Over the next 12 months, earnings growth should accelerate as economic conditions improve. This
will be fuelled by stronger loan growth and a recovery in net interest margins as the cost of funds
normalizes.
The interest rate cycle is likely to be on a rising trend due to higher inflation. In Moody’s opinion,
however, the banks will manage, as the system has traditionally coped with high levels of interest rates.
Moreover, this situation will benefit banks that hold substantial amounts of floating-rate loans and
government bonds.
On balance, liquidity concerns will remain benign given the moderate system loan-to-deposit ratio of
74%, the banks’ substantial government bond holdings and the system’s reliance on Indonesian
rupiah-denominated deposits for funding.
As for asset quality, the non-performing loan ratio declined to 3.82% in November 2009 from the
recent peak of 4.14% in May 2009. Overall, asset quality and credit costs will be contained in the
more favorable operating environment.
Finally, capital levels have held up – as the banks were sheltered from risky global investments by
regulatory restrictions – which allow for future expansion. As of November 2009, the capital adequacy
ratio was 17.08%.
JAPAN
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GLOBAL BANKING
KOREA
Two risk mitigating factors could arise should the global economy decline significantly from our
central scenario (for a sluggish recovery): the domestic banks’ improved external debt position and the
government’s ability to provide additional economic stimulus. The domestic banks had cut their
external debt to U$102.4 billion as of September 2009 from U$126.5 billion at June 2008, and have
made progress in terming out their external debt maturities since mid-2009. We believe that the
government can provide additional economic stimulus if necessary, given its current deficit and debt
levels. However, an unexpected fall in China’s growth dynamic could hurt Korea’s macro economy,
given its dependence on exports for economic growth.
MALAYSIA
Barring further economic shocks, the liquid and well-capitalized banks are favorably positioned to
increase lending. Fee income from better capital market and wealth management opportunities and
manageable provisions should support overall profitability, considering the highly competitive nature
of the lending business. However, there are risks which could test the banks, such as the uneven and
fragile recovery of the advanced economies and disorderly exits from high-stimulus policies. On a
more optimistic note, healthy levels of loan loss reserves and capital offer reasonable protection for
Malaysian banks against further financial stress.
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GLOBAL BANKING
MONGOLIA
The banking system also remains weak as loan quality continues to deteriorate, especially for loans to
the private sector. Excluding the two failed banks, past due loans and non-performing loans were over
17% of total gross loans as of November 2009. Consequently, we expect banks’ profit margin to
remain under pressure in the coming year. In addition, liquidity remains tight as loan-to-deposit ratio
reached a high of 120% as of November 2009, though MNT deposits continue to increase in recent
months.
Recent irregularities at two failed banks also highlight the perils in the operating environment and the
weakness in banks' overall risk positioning, including poor corporate governance, deficiency in
controls and risk management, lack of transparency, and high risk concentrations to individual clients.
The Bank of Mongolia has implemented a range of banking sector reforms, including a key measure to
complete the audits of most banks by internationally reputable firms. However, the effectiveness of
these measures remains to be seen.
NEW ZEALAND
The dramatic monetary policy action taken by the RBNZ during the crisis, cutting official interest
rates from their recent high of 8.25% (in June 2008) to its current 2.50%, was designed to stimulate
the economy. Encouragingly, the RBNZ recently announcing it may start to remove monetary
stimulus around mid-2010, earlier than the previous timeframe of end-2010, should economic
conditions continue to improve.
Whilst we feel non-performing loan (NPL) rates may have peaked, we will continue to closely monitor
these levels in coming months, as some exposures may become delinquent over time. Borrower
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GLOBAL BANKING
concentrations still exist, particularly in the property sector, where development has slowed and final
completion or settlement has been delayed due to factors such as a fall in market value. However, the
recovery in 2010 dairy prices will ease farm cash flow pressures, leading to a greater portion of
performing loans.
The major banks still have significant funding wholesale requirements, at around 40% of total funding.
With the New Zealand government guarantee for wholesale funding still in place, the New Zealand
banks have continued to utilize both the government guaranteed and non-government guaranteed
markets. The four majors are also well under way to meet new RBNZ liquidity policy requirements,
scheduled to be in place by April 2010.
PHILIPPINES
The better economic outlook will support earnings in two ways. Firstly, loan demand should increase.
Secondly, higher interest rates should benefit the banks’ margins as their loans typically re-price faster
than deposits. These factors should moderate the effects of competition and a potential hike in
typhoon-related provisions. The Philippines was hit by a number of typhoons toward the end of
3Q2009. Barring significant shocks, we expect the banks’ loan-loss reserves, capital and earnings
prospects to offer reasonable creditor protection over the next 12 to 18 months.
SINGAPORE
With economic growth, more sustainable loan demand and lower loan loss provisions should follow.
Moreover, rising interest rates could benefit Singaporean banks’ net interest margins. As a result, we
expect bank asset quality and earnings to gradually improve and return to more normalized levels.
8 JANUARY 2010 SPECIAL COMMENT: ASIAN BANKING SYSTEM INDUSTRY OUTLOOKS: 12 SYSTEMS MOVE TO STABLE FROM NEGATIVE
GLOBAL BANKING
TAIWAN
A gradual economic recovery will set the stage for better prospects for the banks, with Taiwan’s GDP
growth forecast at 4% for 2010. Exports have also rebounded in the past several months thanks to
strong orders from China. Therefore, Taiwan banks’ asset quality of the banks in Taiwan is stabilizing.
The NPL ratio for all the domestic banks peaked at 1.63% in March 2009, a marginal increase
compared to 1.53% in September 2008, and declined further, to 1.29% in November 2009.
Moody’s also expects pre-provision profits to rise. Net interest margin, which bottomed between 2Q
and 3Q of 2009, are recovering as time deposits were re-priced. Wealth management income, is also
improving, given the more favorable sentiment in the equity market and the return of consumer
confidence. However, we believe that profitability will improve only moderately as interest rates will
likely increase slowly in order to support economic growth.
Throughout the financial crisis, liquidity has been strong in Taiwan. Funding will not be an issue for
most of the banks, given the industry’s average loan-to-deposit ratio of around 75% and limited loan
growth. In addition, the domestic money market and bond market have been in good order, providing
banks with the avenues to raise capital.
Several risks remain in the banking system. First, net income of the Taiwanese banks could decline, as
they will likely need to set aside more loan loss provisions in order to meet the more stringent
accounting standard that will become effective in 2011. At this time, however, the actual impact to the
banks remains uncertain given that specific regulations are not yet available. Second, single borrower
and industry concentration remains one of the biggest credit weaknesses. We may see a sudden spike
in NPLs, but this will be due to isolated cases.
THAILAND
Nevertheless, Moody's believes that the banking sector will benefit from the Thai government's
continued commitment to supporting the economy with an expansionary budget and stimulus
9 JANUARY 2010 SPECIAL COMMENT: ASIAN BANKING SYSTEM INDUSTRY OUTLOOKS: 12 SYSTEMS MOVE TO STABLE FROM NEGATIVE
GLOBAL BANKING
program. We expect the economy to grow 3-5% in 2010 after a contraction of 3% in 2009. We also
expect credit growth of 5-10% in 2010, after a contraction of 2% in 2009.
The impact of the financial crisis has been limited, as the Thai banks do not depend significantly on
market funding. Moreover, asset quality has been stable since end-2008, with most banks reporting a
decline in NPL ratios, which are targeted to fall to 5% from 5.5% at end-2009. The rated banks'
profitability indicators also remain strong, despite pressure, and are in fact commensurate with those of
higher-rated banks in other markets.
Capitalization metrics do not indicate any imminent threats to the banking system's solvency, ensuring
some stability amid the more volatile operating environment.
VIETNAM
Moody’s notes that the government stimulus and limited global integration reduced the impact of the
global financial crisis on Vietnam. Its GDP grew 5.3% in 2009, contrary to the contractions recorded
by its regional neighbours, and the economy is expected to grow by 5.7% in 2010. Its banking sector
has also been resilient thus far. However, past rapid credit growth is likely to continue and pose
challenges for banks' risk management, asset quality, and capitalization, whilst liquidity is tightening
from satisfactory levels. In addition, the credit fundamentals of the Vietnamese banks remain
compromised by a weak legal system, poor governance, and limited transparency.
Special Comment:
» Asia-Pacific Regional Outlook, January 2010 (122061)
» Global Macro-risk Scenarios 2010-2011 – On the “Hook” for Some Time Yet, January 2010
(122431)
Banking System Outlook
» Japan, December 2009 (121780)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of
this report and that more recent reports may be available. All research may not be available to all clients.
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GLOBAL BANKING
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