Slower growth seen weighing on asset quality of AsPac banks

MANILA, Philippines - Slower economic growth and uncertainty in global financial markets are seen to weigh on asset quality of Asia-Pacific banks this year, Standard & Poor’s Ratings Services said.

“Although we see GDP (gross domestic product) growth in Asia-Pacific improving slightly to 5.4 percent from 5.3 percent in 2013, slower growth and tightening monetary conditions in China could have spillover effects in the region,” Naoko Nemoto, credit analyst at Standard & Poor’s, said in a statement.

“The Federal Reserve will also likely continue tapering its quantitative easing program, and this could lead to more volatile foreign exchange and interest rates,” she continued.

The S&P report identified the slowdown in China’s economic expansion and the capital outflows prompted by the US Fed’s reduction in monthly asset purchases as main risks to the region’s growth. 

However, Standard & Poor’s in December said the “Tiger economies,” namely South Korea, Hong Kong, Singapore and Taiwan, are still seen to outperform their peers this year.

Nemoto said that banks in the region are more vulnerable to shocks given the increasing household and corporate debt.

“Substantial inflows of capital and low interest rates amid global monetary easing have supported high credit growth in the region, but we expect such conditions to hit a turning point in 2014,” she said.

The debt watcher said it sees credit costs rising but a sharp increase is unlikely due to the expted recovery in the global economy.

At the same time, policymakers have been keeping real estate loans in check to prevent any asset bubbles forming in their economies.

“Nevertheless, we expect the profitability of Asia-Pacific’s financial sector to remain constrained because, in our view, intense competition will squeeze net interest margins, loan growth will become subdued because of the already-high indebtedness of households and the corporate sector in some countries, and credit costs will likely rise somewhat,” S&P warned.

However, it was quick to add: “we see the financial profiles of Asia-Pacific banks remaining sound overall and broadly consistent with our current ratings and outlooks.”