The operating environment in many ASEAN countries is turning increasingly negative, which may pose downside risks to bank ratings, says Fitch Ratings.
Rapid credit growth and abnormally low interest rates have supported south and south-east Asian bank performance in a benign domestic credit environment over the last four to five years despite a difficult global economic backdrop. However, this has led to a combination of higher leverage and asset-price inflation, with household debt in particular, rising sharply in some ASEAN countries including Malaysia, Thailand and Singapore. The risks have been manageable thus far, but could become a source of asset-quality problems should unemployment begin to rise and interest rates normalise.
Uncertainties surrounding the Chinese macroeconomic outlook are also a key point of risk for ASEAN banking systems, given the increased trade and financial linkages between south-east Asia and China. Singaporean banks, in particular, face increasing risks related to their direct exposures to China. Even for the majority of ASEAN banks, which have only limited direct exposures, the high level of macroeconomic linkages points to challenges should Chinese growth slow.
It is notable that five of the eight country banking sectors that Fitch assesses in south/south-east Asia are on negative outlook - we have stable outlooks only on Singapore, Malaysia and the Philippines. However, strong loss-absorption buffers - and in particular high levels of core capital - mitigate such risks for many ASEAN banks, and hence the rating outlook for most banks is stable.
In India, the state-owned banks have been the most affected by the pronounced economic slowdown since 2011 and exposure to the problematic infrastructure sector. All government banks' Viability Ratings (with the exception of State Bank of India) have been downgraded over the last one to two years to the 'BB' category. However, the long-term ratings of the major government banks continue to be the same as that of the Indian sovereign, at 'BBB-', thanks to expectations of extraordinary government support for senior creditors.
Indeed, macroeconomic and political risks have abated in India since the election of a new government with a decisive mandate in May 2014. That may have contained further downside risks, while it will take time to achieve a full recovery for the economy and the banks; therefore, rating outlooks are likely to remain stable for now, it said.
In Thailand, the ongoing political uncertainty poses risks to economic stability. For now, the major Thai banks look resilient and remain on stable outlook. However, if a process for stabilisation is not in place in early 2H14, then this may cause a reassessment of our bank ratings.
The Indonesian economy and banks experienced considerable pressure in 2H13, linked to interest-rate hikes and pressure on the rupiah. The economy has since stabilised, however a slower domestic economy indicates that asset quality and profitability pressures could yet rise. The rating outlook for most major banks is stable despite the sector as a whole being on negative outlook, thanks to the banks' strong profitability and loss-absorbing capacity.
Banks in Vietnam have the lowest ratings in our ASEAN banking universe, where they are saddled with a mountain of bad debt and face several structural problems - including the consequences of an extremely undisciplined past. The Vietnamese macroeconomic situation has stabilised over the past 12-18 months. But poor transparency and regulatory forbearance makes it difficult to ascertain the 'true' balance sheet strength of Vietnamese banks. We nonetheless feel that their ratings in the single 'B' range substantially reflect those risks.
On the sub-continent, Indian and Sri Lankan banks are also on negative sector outlook owing to weak operating outlooks.
