Fitch: ASEAN Banks Enter Tough Environment from Strong Position
OREANDA-NEWS. A tougher operating environment amid sluggish economic growth, depreciating currencies and softer commodity prices will continue to challenge banks in many parts of the ASEAN region, says Fitch Ratings. Currency, credit and liquidity risks are increasingly coming into focus, and asset quality is likely to deteriorate - particularly in Indonesia and Malaysia. That said, most banking systems are coming from a position of strength, and are reasonably well-positioned to manage the likely risks.
ASEAN banks are better positioned than prior to the previous regional financial crisis in 1997. Banks now rely less on foreign capital, have better hedged their foreign exposures, and have more stringent regulatory frameworks.
From a macro perspective, only Indonesia is running a current account deficit, whereas this was the case with most ASEAN countries prior to the 1997 Asian financial crisis. Every large country in the region - barring Vietnam - now also benefits from the flexibility of a floating exchange rate. Fundamentally, too, ASEAN banks have lower NPL ratios, lower loan/deposit ratios, higher capital adequacy ratios and higher loan-loss reserve coverage.
One key variable which is less favourable for banking sector stability is a more leveraged household sector, which has increased significantly since 1997. Notably in Malaysia and Thailand, the debt/GDP ratio had risen to 88% and 80%, respectively, by end-2014 from 50% and 40% in 1997.
The risks facing ASEAN banking sectors are not evenly dispersed. Malaysia and Indonesia are likely to be more affected by the macroeconomic and external environment due to their greater dependence on commodities. The Malaysian ringgit and Indonesian rupiah have depreciated the most since end-2013, and there are pockets of greater risk in specific sectors - especially those related directly to the commodity sector.
Indonesia is in a weaker position than Malaysia, with greater exposure to the potentially vulnerable mining and commodities sectors. But a Fitch stress test of nine rated Indonesian banks, which accounted for 65% of system assets at end-2014, indicated resilience to higher credit costs and a weaker rupiah. Strong profitability and capitalisation, in particular, will help to protect these banks from continued macro headwinds.
Malaysian banks have sound buffers, with adequate system profitability, capitalisation and liquidity which will help cushion against rising asset-quality, funding and liquidity risks. Furthermore, financial and natural hedges serve to reduce the risk inherent in external borrowings by Malaysian corporates.
Nonetheless, the weaker credit outlook and a further tightening of system liquidity could test Malaysia's buffers. We see only a low probability of tighter liquidity conditions leading to sustained credit contraction in Malaysia, but the potential negative repercussions could be significant if this were to occur.
There are pockets of risk from an external funding pullback, but Fitch does not expect a broad-based regional crisis. Malaysia and Thailand, with their increased reliance on cross-border interbank credit since the 2008 global financial crisis, are more exposed in the event of protracted liquidity tightening. But Fitch expects the pressure on banks to be manageable even in these markets.
Philippines banks - with robust domestic demand, resilient external liquidity flows, and low private external debt - are better positioned to face the macroeconomic challenges than the other ASEAN banking systems.