The recent resurgence of COVID-19 in parts of Asia-Pacific is likely to hit economic recovery, delaying the process of normalization of bank earnings in some emerging markets in the region, according to S&P Global Ratings analysts.

Asia-Pacific is seeing a "K-shaped" economic recovery as vaccine rollouts in the region have been relatively slower than those in developed nations such as the U.S. and U.K. The global banking sector is clawing back to normalcy and lenders' balance sheets are starting to get better, a process that may take longer in Asia-Pacific, the analysts said at a July 28 webinar on the rating agency's Global Banking Outlook Midyear 2021 report.

Lenders in Indonesia, Thailand and the Philippines face asset quality concerns following the latest waves of infections. Indonesia has been one of the hardest-hit countries, they noted.

The negative outlook on Indonesian banks reflects the downside risks that could emanate from a large pool of restructured loans, said Geeta Chugh, senior director and sector lead for India, South and Southeast Asia at S&P Global Ratings. Nearly 18% of loans at the country's lenders have already been restructured, and that number could extend to as high as 25%, Chugh said.

Various forms of relief to lenders, including moratoriums on repayments in Thailand and the Philippines may keep chunks of loans unresolved until 2023, Chugh said.

"The most important factors for the banking sector will be the resumption of financial and economic activity, government support for worst-affected sectors, particularly [small to medium-sized enterprises] and low-income households, and finally, liquidity concerns," Chugh said.

Major economies

Among major Asian economies, the economic disruption from the second wave of infections in India will be a challenge, Ratings said.

"What distinguishes India from some of the other systems is that Indian banks did not enter this pandemic from a position of strength. The lenders were always struggling with a high level of weak loans well before the pandemic struck," Chugh said.

The overall expectation for India is that the weak loans will remain elevated at 11%-12% in the next 12 to 18 months. Credit losses in India could remain around 2.2% before recovering to 1.8% in 2023.

However, after recent revisions, Ratings now expects that credit losses will remain below the expected long-term average for many other countries in the Asia-Pacific region, despite the "severe economic hardship" caused by the pandemic. "This solidifies our views that downside risks are moderating amongst Asia-Pacific banks," Chugh said.

While credit losses as the percentage of loans is likely to shrink at Asia-Pacific banks over the next two years, China is a major exception, having taken its pain up front with close to $300 billion in credit losses in 2020. Still, the fallout of the pandemic is not entirely over, Chugh said, adding that in total, Chinese banks "will need to tackle" a little over $1 trillion in credit costs for the period of 2020-2022 due to COVID-19 and other asset quality problems.

Meanwhile, lenders in Australia and Singapore had frontloaded provisions in 2020 in anticipation of an economic downturn, resulting in healthier banks.

"We also note that the asset quality stress on many of the region's financial institutions was at a historically low level before the pandemic struck, whether it's Singapore or Australia," she said, adding that banks in these countries had low credit costs before the pandemic, so a spike in credit losses in 2020, while significant, was off a very low base.