(The following statement was released by the rating agency)
Sept 17 - Fitch Ratings says a progressively weaker operating environment in Asia Pacific is exposing potential structural weaknesses that may lead to rating pressure on banks in China and India and greater caution elsewhere in the region.
Fitch has cut its forecast for emerging Asia’s 2012 GDP growth to 6.3% in June 2012 from 7.4% a year earlier, and risks to regional growth remain on the downside. Regional economies with structural weaknesses such as larger fiscal deficits or external imbalances have less scope for policy flexibility to respond to the slowdown.
In a special report published today, Fitch says that a high proportion of Indian bank ratings are on Negative Outlook, reflecting that of the sovereign ratings. For China and India pressure is also building on Viability Ratings. The consequences of China’s rampant credit growth on bank credit quality and solvency are now becoming evident. India’s more protracted slowdown means the credit fundamentals of state-owned banks are also under pressure, after a build-up of single-name and sector concentrations and rising non-performing loans (NPLs).
More generally Asia has seen rapidly rising leverage which, together with greater exposure to China, will constrain upward rating momentum in Asia. Hong Kong’s strong economic ties with China, and its banking system’s growing exposure to the mainland, mean its banks are also vulnerable to deterioration in the Chinese economy.
Elsewhere in emerging Asia credit fundamentals look relatively stable for their existing rating levels. NPLs are coming off historical lows but most issuers enjoy solid funding structures and comfortable absorption features to offset the risks of a sharper downturn. Banks in weaker-rated Mongolia, Sri Lanka and Vietnam are more sensitive to a slowdown in economic growth due to risks attached to recent rapid credit growth, the overhang of previous excessive credit growth, or other structural weaknesses in these lower-income economies.
In the region’s high income developed markets, bank ratings are on Stable Outlook. Singaporean and Australian banks have demonstrated resilience through the global crisis. Yet Australian banks, despite progress in reducing reliance on international capital market funding, remain sensitive to external shocks. This is because there continues to be this funding reliance and also because of the economy’s exposure to China, particularly resources. Key areas to monitor will be corporates that benefited from the resource boom, and employment in light of high household leverage.
For Japan, mega-banks have been encouraged by weak prospects at home, and retrenchment by European banks in Asia, to use their strong liquidity for accelerated expansion in Asia. This strategy is not without its risks, given the less-developed operating environments in the rest of Asia. These are all areas to monitor, together with asset quality pressures in Japan’s domestic SME market.
The report, “Asia-Pacific Banks: Growing Caution”, is available on www.fitchratings.com or by clicking on the link above.
Link to Fitch Ratings’ Report: Asia-Pacific Banks: Growing Caution