AsPac banks face balance sheet stress risks – Moody’s

MANILA, Philippines - Asia-Pacific banks are at risk of balance sheet stress once interest rates rise globally as a result of US recovery over the next two to three years, debt watcher Moody’s Investors Service said yesterday.

The region’s lenders still boast with resiliency now as they benefited from low interest rates.

“However, during that period, borrowers’ leverage has increased, asset prices have materially appreciated and, in the process, both borrowers and banks may have become more susceptible to asset quality deterioration,” said Moody’s managing director Stephen Long in a forum in Singapore.

This is true, he was quoted as saying in a statement, “especially if the interest rate cycle turns” which could happen in the next two to three years.

Lenders from China to those based in Southeast Asia, including the Philippines are facing “downside risks” particularly in liquidity, profitability and over-all financial stability once interest rates rise.

In the past month, the US signaled it could scale down stimulus measures later this year, before completely withdrawing its $85-billion bond buying program next year. This as the world’s largest economy showed signs of recovery.

The cheap money and prevailing near-zero rates in the US have allowed other countries, such as those in the Asia-Pacific to follow suit by lowering their own interest rates after the 2008 global financial crisis.

This, in turn, has resulted into the flush of liquidity in the financial system as banks search for higher yields by boosting lending activities.

“While it is difficult to exactly predict turning points in banking credit cycles, the increased likelihood of tightening of US monetary policy – with a higher probability of a tapering of quantitative easing during our outlook period – is a potential trigger,” Long pointed out.

“In this context, Moody’s notes that the exit from loose monetary policies in the developed economies will test Asian banks’ asset quality during the next two to three years,” he added.

In particular, banks in the 10-member Association of Southeast Asian Nations (Asean), including those from the Philippines, are expected to “remain resilient” as strong growth that improved domestic wealth help boost loan demand.

They, however, could face weakness in asset or loan quality, indicating high probability of default.

“Downside risks are increasing and these growing risks to economic and financial stability are driving diverging outlooks for the region’s banking systems,” Long said.

The outlook is nonetheless bleaker for China, he said, pointing to the growth re-balancing efforts which will impact in the form of defaults, credit crunch and over-all profits of banks.

“And finally, another key question is whether Asia-Pacific remains unaffected by the global shift towards burden-sharing in bank resolution,” Long said.