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Banks in the Asia-Pacific region are on a stable path heading into 2022, putting the worst of the COVID-19 pandemic behind, according to S&P Global Ratings.
The rating agency's net ratings outlook bias for the Asia-Pacific banking sector improved to zero in November 2021 from negative 24% in November 2020, according to a Jan. 25 report. About 67% of ratings outlooks on banks are stable and the trend will likely continue, with some variations, Ratings said. The outlook trends in Asia-Pacific broadly mirror those in other regions, it said.
"Our base case is that most banks are getting back on track, at least compared with the nadir of 2020 when the pandemic was most disruptive," Ratings said. Still, the agency would watch out for potential risks from the economic recovery stalling due to residual effects of the pandemic or any "idiosyncratic factors" across the region's diverse banking sector.
Infections have surged in many countries since December 2021, fueled by the highly transmissible omicron variant of the coronavirus. While the omicron strain has so far proved milder than previous variants, it may drag on the economic recovery in large parts of Asia-Pacific. China, India, Japan and several Southeast Asian nations are battling with outbreaks, and economic activity has been affected in many parts of the region.
Asset quality
Chinese banks are well cushioned to absorb any worsening of asset quality, but property sector weakness will still weigh on lenders, Ratings said. Aggregate nonperforming loans in China may fall to 4.7% in 2023, down from 10.3% in 2020, S&P Global Ratings analyst Ming Tan said on a call.
Credit costs should begin stabilizing from 2023 as Chinese lenders are likely to write off and release provision coverage that was close to 200% of nonperforming loans as of the third quarter of 2021. These strains should be manageable for larger Chinese banks, though smaller banks may struggle.
"We believe the government has the resources and policy flexibility to support troubled banks. However, government support in the long term will become more selective," Tan said.
While the focus is on China, property-related risk factors have the potential to pick up in other parts of Asia-Pacific. "Residential real estate represents a significant proportion of banks' loan books across Asia-Pacific. House prices in numerous jurisdictions have increased strongly, fueled by near-zero interest rates," Ratings noted.
Mixed bag
The resurgence of the virus, low vaccination rates and a high level of loans under moratorium are affecting banks in several Southeast Asian nations such as Indonesia, Thailand, Malaysia and the Philippines.
The high level of restructured loans in Thailand and Indonesia has led to their negative outlook, Ratings said, adding that COVID-19-related restructured loans in both Southeast Asian nations are about 15% of their total, the highest among regional peers.
Meanwhile, Singapore and Australia continue to maneuver the road to recovery smoothly. Singapore's banking sector is expected to recover back to pre-pandemic levels in 2022.
"We haven't seen any appreciable increase in the nonperforming loans of Singapore banks," said Ivan Tan, director and lead analyst at S&P Global Ratings. Ratings expects NPLs in Singapore to remain between 1.5% and 2% in 2022.
In Australia, improved funding profiles will help the banking system as it recovers from the pandemic. Ratings believes that credit losses among Australian banks over the next two years should remain low and close to pre-COVID-19 levels.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.