Fitch Ratings-Hong Kong/Singapore-03 December 2018: Fitch Ratings’ outlook on the Asia-Pacific banking sector is stable for 2019, but tailwinds have faded across most of the region and more markets now face a negative sector outlook than a year ago. Trade tensions, rising interest rates and slower economic growth in China remain key factors that could test banks’ asset quality, while rising regulatory, compliance and accounting requirements could exert pressure on costs and challenge strategies in a number of markets.
Fitch revised the sector outlooks for Hong Kong, Singapore and Indonesia to negative, from stable in 2018. We kept Australia, China, India and Sri Lanka on negative, while New Zealand was revised to stable from negative. The outlooks for the other nine countries remain stable.
Domestic credit growth is likely to slow in most developed markets, as weaker economic growth, high private-sector leverage and cooling property markets drag on loan demand. Banks pursuing growth in emerging markets, especially markets where our sector outlook is negative, could be exposed to rating pressure if risks are not offset with additional loss-absorption buffers.
We expect credit growth to be more resilient in emerging markets, as high levels of investment – including government initiatives to upgrade infrastructure – will support demand for bank funding. However, regulatory tightening and weak bank capitalisation are likely to continue to hold back lending in China and India.
Asset quality is likely to deteriorate slightly in most markets, pushing up credit costs, as rising interest rates and slower economic growth put pressure on borrowers. Rising debt-servicing burdens have been particularly sharp in Indonesia and the Philippines, which have been buffeted by global market volatility. In contrast, credit costs are likely to fall significantly in India and Mongolia, where asset-quality reviews have been completed and banks have shifted toward resolution of legacy portfolios.
The property sector is a key risk for many markets, particularly in Australia and Hong Kong, but we do not expect sharp downturns, and most banking systems have buffers to absorb considerable stress.
Conduct-related investigations and fines are likely to add to cost pressures in some countries. Conduct cases have been exposed in Australia, where more news is likely to follow, while other cases have come to light for banks headquartered in Hong Kong, Taiwan and Japan. Besides financial penalties, banks are likely to face higher compliance costs as they respond to closer regulatory scrutiny.
Higher interest rates will generally support net interest margins, but the impact will be dampened in some markets by high competition and ample liquidity. Overall, we expect profitability to be broadly stable across the region.
Capitalisation is unlikely to change much amid stable profitability. Banks facing higher requirements next year – mostly in developed markets – are generally in adherence with or are expected to comply with the new minimums by the implementation date. Capital remains under pressure in several emerging markets – most notably China, India and Vietnam – due to the challenges faced in raising capital in local markets. Rapid credit growth in Mongolia – the fastest in the region, at above 30% – will test banks’ capitalisation.