Higher US rates will pose challenges to some Asian banks

 

It noted that as the higher US rates mean the peak of the positive credit cycle enjoyed by non-Japanese Asian banks. This could put pressure on banks particularly those in Malaysia and Thailand where credit growth skyrocketed in the past years. 

"When US interest rates start to gradually rise, the overall resulting tighter global liquidity will lead to higher interest rates in Asia," said Eugene Tarzimanov, Vice President and Senior Credit Officer at Moody's Financial Institutions Group in Asia Pacific. 

"On balance, however, the credit profile of banks in Asia will prove resilient to the adverse effects of higher interest rates, such as somewhat higher problem loans, because of their strong internal buffers," addedTarzimanov.

Moody's points out that after the 2008 global financial crisis, Asian banks (ex-Japan) have generally enjoyed a sustained period of positive credit conditions, driven by steady economic growth, moderate inflation rates and increasing regional trade. Moreover, the very low interest rates evident in Asia since 2008 have fuelled rapid credit growth in most Asian economies, and contributed to material rises in property prices in major urban areas.

As a result of extensive new borrowings by non-financial corporates and households, domestic credit - as a share of GDP - increased to a high 120-150 per cent in many Asian economies at the end of 2013. From an historic perspective, these levels are particularly elevated when compared to around 50-80 per cent in the early 1990s.

Moody's considers that, as interest rates gradually rise, a small share of overstretched borrowers in Asia could face difficulties servicing their loans, resulting in somewhat higher problem loans for Asian banks.

Furthermore, corporate leverage ratios in emerging Asian economies like China, Thailand, India, Indonesia and the Philippines have deteriorated, leading to Moody's conclusion that the quality of corporate exposures in emerging Asia may deteriorate to a somewhat greater extent, compared to the more advanced markets whose leverage has been more stable.

Moody's says that because households in Malaysia and Thailand have borrowed more extensively than households in other Asian markets, their 

household debt to GDP ratios reached 85 per cent and 70 per cent respectively, in 2013. 

On the property market in Asia, Moody's points out that prices have either started to decline moderately or have remained stable in Singapore and Hong Kong, following regulatory actions in 2013 aimed at dampening property prices and deterring speculative transactions. Moody's says that these regulatory actions have lowered the risk of abrupt price corrections.

Most Asian banking systems are characterised by low levels of problem loans, ranging from 0.5 per cent in Hong Kong to around 2% for banks in Southeast Asia at end-2013. As a result, any deterioration in the quality of loan books is starting from a strong base. In addition, their profitability levels are healthy, with average pre-provision  incomes to risk weighted assets of around 3 per cent, and net income to risk weighted assets of around 2 per cent.