Suggested keywords: Moody’s Investors Service, problem loans, non-performing loans (NPLs), economic conditions, credit rating agency, pandemic, return on tangible assets (ROTAs), coronavirus, tangible common equity (TCE)

Moody’s Investors Service has projected that problem loans or non-performing loans (NPLs) will double on average across the 14 APAC (Asia-Pacific) economies by 2022, led by India and Thailand as economic conditions severely worsen.

Banks in India and Thailand expect to see the largest increases in NPLs due to the greater severity of economic shocks to their economies and the historically poor performance of certain loan types, as per the global credit rating agency’s assessment.

“Credit costs will increase the most at banks in Thailand, India and Indonesia, which already had the highest credit costs in APAC before the pandemic. Nearly half of rated banks in Thailand and India are likely to make annual net losses during 2020-22,” the agency said in a note.

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While credit costs will increase as asset quality deteriorates, Moody’s estimates pre-provision income will decline 5 per cent-10 per cent in 2020 from 2019 due to falls in interest rates across APAC and a flattening of yield curves.

As a result, banks’ profitability, as measured by return on tangible assets (ROTAs), will deteriorate significantly across APAC in the coming years, it added.

The agency underscored that the combination of higher credit costs and lower revenue will drag down APAC banks’ average ROTA by about 50 basis points by 2022 from 0.9 per cent in 2019.

“At the onset of the coronavirus crisis, banks in Indonesia had the highest average ROTA, while those in Japan and India had the lowest.

“The stronger a bank’s profitability is, the better its first line of defense against credit losses is, which explains why Indonesian banks have the highest capital ratios,” it added.

Moody’s estimated that core capital, as measured by tangible common equity (TCE) as a percentage of risk-weighted assets (RWAs), will decline at 78 per cent of the 218 banks in APAC by the end of 2022 from the end of 2019.

However, declines in capital at most rated banks will not be significant enough to prompt the agency to change its views on their fundamental creditworthiness, which also take into account other factors of solvency and liquidity.

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Among the 14 APAC banking systems, Moody’s said TCE ratios will decline the most significantly in Sri Lanka and India due to the severity of economic shocks to the countries, banks’ weaker starting solvency metrics, and historically weak underwriting. By contrast, capitalisation will strengthen in Indonesia as a result of banks’ strong profitability.

As per the agency’s assessment, TCE ratios at the majority of rated banks in India, Thailand and Sri Lanka will plunge by more than 200 basis points by 2022, while in other economies, the proportion of such weak performers will range from 10 per cent to 30 per cent of rated banks. In Malaysia, no bank will lose more than 100 basis points of TCE.

Moody’s observed that in some economies, government guarantees and other support schemes will curb build-ups in NPLs. Among other measures, government guarantees for SME loans are a key part of efforts to protect jobs and ultimately public consumption. However, they will provide a limited boost to capital for banks in APAC.