Asian banks still stable, says S&P
Banking systems in Asia have achieved a good measure of stability although China's is facing increasing vulnerability from rapid credit expansion, Standard & Poor's Ratings Services stated yesterday in two separate commentaries.
"The situation in Asia reflects the improved financial profiles of banks across the region," said Ritesh Maheshwari, a Standard & Poor's credit analyst, in a commentary titled "Bank Industry Country Risk: The Asia Picture". "Healthy macro factors and strong earnings have boosted bank performance and lifted asset quality in the past few years, and risk-management practices and regulatory environments generally have strengthened," Maheshwari wrote. Nevertheless, Asian banking systems still face medium-to-high economic and industry risks, unexpected shocks, and the inevitable future cyclical slowdown. "An economic slowdown would be the litmus test for the banks' credit-risk-management systems, though it should be noted that banking systems will face the potential challenges from a position of strength, given the structural improvements made since the Asian financial crisis," said Ping Chew, another Standard & Poor's credit analyst. The Chinese banking system's increasing vulnerability reflects high economic and industry risk in the sector, despite improvements in its fundamentals in the past few years, Chew wrote in a commentary titled "Rapid Rise In Interest Rates Or [yuan] Renminbi Could Stretch China's Embryonic Banking System." "Although the banks in China are increasingly operating on a commercial basis, their developing credit and risk management systems are likely to be severely stretched by rapidly changing economic conditions and the relatively high gearing of the corporate sector," said Standard & Poor's credit analyst Ryan Tsang. A rapid rise in interest rates or the yuan could further stretch China's embryonic banking system. Standard & Poor's estimates that if the yuan appreciates 25 per cent and interest rates increase by 200 basis points - both rapidly - the corporate sector's aggregate net profit could decrease by about one-third. At the same time the banking sector's non-performing loan ratio could rise by up to nine percentage points, should both sectors fail to take any countermeasures to mitigate risks and losses.
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