Fitch sees Asian banks posting lower revenues, higher non-performing loans

London-based Fitch Ratings expects Asian banks to post lower revenues and higher non-performing loans (NPLs), resulting in reduced but for most systems still positive levels of net profitability.

Fitch noted the negative impact of the global financial turmoil on the region.

With this development, Fitch said banks need additional capital to offset the effect of credit losses and to boost capital levels to the new higher norms that are becoming the standard in the wake of the credit crisis.

“In view of the more challenging economic conditions, the balance of Asian banks’ rating outlooks has shifted decisively toward negative over the past year, while the negative outlooks for some sovereigns, notably Thailand and Korea have led to similar outlooks being assigned to banks in these countries.

As this developed, Fitch affirmed its ratings on the Land Bank of the Philippines, a government financial institution.

In a statement, Fitch said it affirmed its long-term foreign and local currency Issuer Default Ratings at ‘BB’ or non-investment grade and its national long-term rating at ‘AA’ or investment grade.

The ratings agency said that in affirming the ratings, it factored in the banks improving asset quality, stable core profitability and moderate capitalization.

“These factors, together with the moderate support that is expected from the government, which wholly owns the bank, should help mitigate downside risks to the ratings, amid the difficult economic conditions over the next 12 to 18 months,” Fitch said.

Data from the bank showed that its gross non-performing loan (NPL) ratio improved to 5.6 percent at end-2007 from 17.7 percent at end-2004 mainly driven by aggressive sales of its idle loans.

However, Fitch notes that the bank still carried deferred losses booked on these sales in 2005, which was P8.1 billion at end-2007 or 2.1 percent of assets. These deferred losses are being amortized over a period of 10 years.

Landbank’s loan loss reserve – although high relative to NPLs at 145 percent at end-2007 – covered 72 percent of NPLs and deferred losses combined, which appears quite satisfactory as compared with the industry average of around 80 percent.

While the banking sector’s asset quality is likely to deteriorate amid the economic weakening, the deterioration is likely to be less severe for Landbank, given its large agriculture and allied sector exposures.

Meanwhile, foreclosed properties were 3.4 percent of assets and 30 percent of equity at end-2007. Like most Philippine banks, the reserve coverage on its foreclosed properties continues to be low.

Despite these factors, the outlook on Landbank’s ratings remains stable, due to the bank’s moderate capitalization and satisfactory level of reserves, which should enable it to absorb higher losses that are likely amid the weaker economic environment.