Asia banks 'can withstand headwinds'

The days of easy credit with low interest rates and ready availability of funding appear to be coming to an end for banks in Southeast Asia.

“High levels of household indebtedness in Singapore, Thailand and Malaysia might leave these banking systems vulnerable to rising interest rates and asset quality pressure,” S&P’s credit analyst Ivan Tan said yesterday. 

“However, we believe banks have sufficient financial buffers to withstand these challenges.”

For Thailand, the promise of an economic revival under the military government should give a much-needed boost to the country’s growth.

Singapore banks, in particular, will be net beneficiaries under the base-case assumption of gradual rate hikes. Higher interest rates will provide a revenue boost as variable rate loans are re-priced upwards. 

Leading indicators of unemployment and bankruptcy are likely to remain low in Singapore, which will continue to support debt repayment. Interest on loans is likely to rise faster than interest on customer deposits.

Interest margins could start to increase from the middle of the year as re-pricing kicks in. The rise in margins will mark an important reversal after several years of compression.Indonesian banks’ asset quality and interest margins will continue to be pressured this year. The deterioration in Indonesian banks’ asset quality is likely to be gradual, coming off a very low base, and its impact on credit costs should be manageable. 

Banks will continue to feel the squeeze on their liquidity and interest margins, but will remain among the most profitable by global standards.