US-China trade war has negative impact on Asian banks in 2020 – Moody’s

Published December 9, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The escalating trade conflict between the US and China will hurt banks in the Asia Pacific in 2020 as interest rates margin fall amid higher asset risks and a “deteriorating” operating environment, according to credit watcher Moody’s Investors Service.


In its “Banks – Asia Pacific 2020 Outlook” report (December 9), it said that for banks in the region, it had a negative outlook in the next 12 months because banking sectors have vulnerable operating environment that will affect GDP growth.

“(The) US-China trade dispute will weaken economic and trade activity in the region, and erode investor confidence,” said Moody’s in the report.

The report covered 17 banking systems in Asia Pacific, such as the Philippines, Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Mongolia, New Zealand, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam.

The report said that while the trade dispute has negative spillover effects on economies, most central banks including the Philippines’ Monetary Board, has reduced interest rates this year to spur economic activities. But, it added, “more accommodative monetary policy will depress interest margins for banks.”
“Weaker operating conditions will lead to moderately higher asset risks for banks,” the report said.

In the same report though, Moody’s said Asia Pacific banks “generally have good capital and liquidity buffers against increasing risks” and that the “probability of government support will remain high for APAC banks” except in Hong Kong.

About 78 percent of Asia Pacific banks have “Stable” outlook from Moody’s in 2019, and this includes the Philippines.

Moody’s previously reviewed local banks which it assessed will remain stable, with strong asset quality, steady income from sustained economic growth, and it’s also assured of government support, especially for the dominant large banks.

Based on its “Banking System Outlook – the Philippines” report (June 2019) it said the outlook for the local banking system remains stable in the next 12-18 months, and that Philippine banks “will continue to benefit from strong economic growth”.

For 2019 and until next year, Moody’s expect banks’ loan growth to recover to 13-15 percent yearly which will affect capitalization, but only moderately.

Moody’s reported that rapid credit growth because of real estate loans is a risk factor. But overall, in terms of loan-loss provisions, local banks have strong buffers, and the credit rating agency noted that the industry has consistently made sure it has a non-performing loan coverage of more than 100 percent.

Based on the Asia Pacific outlook report, for banks in the region, asset risks are expected to increase as operating conditions deteriorate, said Moody’s.
“Problem loan ratios will increase modestly in many markets,” it said. It also noted that there will be a “handful” of banking systems in the region that will “post lower problem loan ratios, as banks gradually clean up legacy problem loans.”

In a statement Monday, Moody’s Vice President Eugene Tarzimanov said: “Weaker economic and trade conditions will lead to moderate increases in problem loans for APAC (Asia Pacific) banks”.