Asian banks can expect bad loans to rise in the coming months as interest rates trek up, putting pressure on over-leveraged borrowers’ ability to meet their obligations, Moody’s Investor Service said Wednesday.
Fortunately, the debt watcher said adequate loan-loss buffers built up over the years were expected to protect the region’s financial system from any serious risks resulting from tighter global credit conditions.
“When US interest rates start to gradually rise, the overall resulting tighter global liquidity will lead to higher interest rates in Asia,” said Eugene Tarzimanov, Moody’s Financial Institutions Group vice president and senior credit officer at Moody’s Financial Institutions Group.
“On balance, however, the credit profile of banks in Asia will prove resilient to the adverse effects of higher interest rates, such as somewhat higher problem loans, because of their strong internal buffers,” Tarzimanov added.
Moody’s pointed out that after the 2008 global financial crisis, banks in Asia, excluding Japan, generally enjoyed a sustained period of positive credit conditions, driven by steady economic growth, moderate inflation rates and increasing regional trade.
“As interest rates gradually rise, a small share of overstretched borrowers in Asia could face difficulties servicing their loans, resulting in somewhat higher problem loans for Asian banks,” the firm said.
Furthermore, corporate leverage ratios in emerging Asian economies like China, Thailand, India, Indonesia and the Philippines have deteriorated, leading to Moody’s conclusion that the quality of corporate exposures in emerging Asia might deteriorate to a somewhat greater extent, compared to the more advanced markets whose leverage has been more stable.
Moody’s noted that most Asian banking systems were characterized by low levels of problem loans, ranging from half a percent in Hong Kong to around 2 percent for banks in Southeast Asia at end-2013.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed major banks in the Philippines had non-performing loans (NPL) that were equivalent to 2.16 percent of their total portfolios.
“As a result, any deterioration in the quality of loan books is starting from a strong base,” Moody’s said. Paolo G. Montecillo