Euro zone weakness may affect Asia-Pacific banks: S&P

Non-performing loans and credit provisioning are likely to increase, especially in banking systems exposed to high inflation, such as in India and Vietnam, as Euro zone weakness dampens global and regional growth, said credit rating agency Standard & Poor's in a report.

This observation also holds good for the banking systems of China and Hong Kong too, which witnessed high credit growth.

The report, ‘A slowdown in Europe and China, and sluggish exports moderate Asia-Pacific credit outlook in 2012', has assessed that the banking sector's earnings are likely to weaken to reflect a dip in business volumes associated with slower economic activity.

Contagion from Europe

“Contagion from Europe could unleash more anxiety in the already jittery credit markets in Asia-Pacific. Banks and other lenders in the region are already paying more to insure their debt financing, as reflected in the widening credit spreads,” the report said.

The speed and effectiveness with which the European debt crisis is alleviated will determine the 2012 outlook for banking systems in Asia-Pacific, it added.

Banks in Asia-Pacific generally have little direct exposure (largely in the form of short-term trade finance) to the Euro zone. However, European banks have been reducing their significant exposures in parts of Asia-Pacific.

Consequently, the indirect impact of a dislocation in global funding markets and an economic slowdown in Europe could negatively affect banks in Asia-Pacific.

The report pointed out that the region's strong economic performance over the past few years has been the biggest supporting factor for the credit profile of Asia-Pacific banking systems. Economic performance has not only bolstered revenue growth, but also underpinned asset quality.

Underwriting standards

A tightening of credit underwriting standards and lower lending among Asia-Pacific banks would challenge the region's corporate sector given the sector's high dependence on bank funding, including that from European banks.

S&P's credit outlook for the Asia-Pacific corporate sector in 2012 is generally stable with patches of weakness in sectors such as home builders/property developers, transportation, hi-tech, media/entertainment, steel, banking and building materials.

The corporate sector's debt maturities are not likely to be heavy in 2012, reflecting companies' efforts to spread maturities. Nevertheless, some sectors and entities could face reduced access to funding.

“Refinancing requirements are manageable for Asia-Pacific corporate entities with investment-grade ratings. However, liquidity and refinancing will remain dominant credit drivers for lower-rated entities,” said the report.

Impact of slowdown

The impact of another slowdown may not be as much for countries such as India, China and Indonesia, which have sizeable domestic economies.

However, some economies in the region, such as Singapore, Thailand and the Philippines, rely heavily on export-driven income, and any slowdown in global growth may affect their economic growth.

Sovereign ratings

Mounting challenges across the globe could severely test the resilience of sovereigns in Asia-Pacific.

The uncertainty over sovereign debt and banking sector stability in the Euro zone is by far the biggest of these challenges.

“Unless sentiments are stabilised by appropriate policy actions, the confidence crisis in Europe could significantly affect Asia-Pacific sovereigns through tighter funding conditions, persistent risk aversion, and volatile capital flows, or a credit freeze,” S&P said.

> kram@thehindu.co.in

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