Shakier asset quality remains key risk for Asia-Pacific banks, says S&P

Factors constraining the asset quality of Asia-Pacific banks will persist, according to Standard & Poor's Ratings Services.

The rating agency said in a recent report that although the region's economy is likely to show a moderate recovery this year after a sharp drop in growth last year, some headwinds in the global economy, such as negative GDP growth in the euro zone, continue to weigh on growth in Asia and the Pacific.

Meanwhile, some of the more debt-laden corporate and household sectors in the region remain susceptible to external shocks.

"Hikes in property prices, some fuelled by easy monetary conditions in the global market, pose additional risk to banking systems in many countries," said S&P credit analyst Ritesh Maheshwari. "In contrast to Europe and the US, private-sector credit in Asia-Pacific has grown over the past several years." Maheshwari also notes that the fast pace of loan growth, particularly in emerging markets, could encourage excess investment and lead to economic imbalances.

"The low-interest-rate environment and intense competition are squeezing banks' loan margins, which may in turn constrain their revenues. Hence we believe that the banks will feel compelled to execute cautious credit control as well as proper pricing and growth strategies," he said.

Despite ongoing constraints on asset quality and earnings, S&P believes adequate capitalisation, strong liquidity and government support will underpin its ratings on most Asia-Pacific banks.

"Currently, 78 per cent of our outlooks on Asia-Pacific bank ratings are stable. However, our outlooks on the ratings on half of the banks in Japan and all of the banks in India are negative, reflecting our negative outlooks on these sovereign ratings, while other sovereign ratings in the region have stable outlooks."

S&P forecasts real growth in the region's gross domestic product to improve slightly, to 5.0 per cent in 2013 from an estimated 4.7 per cent in 2012. However, still-fragile conditions in key economies, particularly in the euro zone, continue to weigh on growth in the Asia-Pacific region, which is susceptible to the slowdown in global trade and currency fluctuations.

A hard landing in China, with much weaker economic growth than S&P's base case of 8.0 per cent, would also have significant knock-on effects on growth in many countries. "Although the threat of a hard landing appears to have receded, we expect 8.0-per-cent GDP growth in China in 2013, which is lower than 2005-2011 levels."

S&P has published industry reports on the banking sectors of 14 countries in the Asia-Pacific region.