Top bankers in Asia-Pacific warned that high interest rates will drag on the region's economy in the second half of 2023, despite a relatively resilient economy.

Bank executives said the second half of the year is unlikely to be as strong as the first, after many lenders in countries such as India and Singapore reported record earnings, driven mainly by net interest margin (NIM) gains as loan demand surged after the COVID-19 pandemic. Currently, deposit rates are catching up as well, eroding the NIM advantage for lenders as high interest rates deter investment.

In several key global economies, inflationary pressures persist, leading to higher interest rates for longer.

Oversea-Chinese Banking Corp. CEO Helen Wong. Source: Oversea-Chinese Banking Corp.

"We see inflationary pressure and interest rates expected to stay higher potentially for longer," Helen Wong, CEO of Oversea-Chinese Banking Corp. Ltd., said at the Singapore lender's post-earnings call Aug. 4. "ASEAN economies are resilient, although growth momentum has eased a bit into the second half of the year, but they are still above the global average."

ASEAN, or the Association of Southeast Asian Nations, comprises 10 countries, including Singapore, Malaysia and Indonesia, in one of the world's fastest-growing regions.

Global slowdown

Wong echoed concerns over the global economic slowdown, pointing to headwinds that have impacted the global economy: banking stress, faster-than-expected rate rises and the possibility of a recession in the US.

The International Monetary Fund expects global growth to fall to 3% in 2023 and 2024, from 3.5% in 2022, according to its World Economic Outlook July update. Emerging and developing Asia's growth is projected to reach 5.3% in 2023 from 4.5% in 2022 and 5.0% in 2024, the IMF said July 25.

In China, home sales by the country's top developers fell 33.1% year over year to 350.4 billion yuan in July, according property service firm CRIC China. Early in August, China announced that July exports declined by 14.5% from the same month 2022, while imports also fell by 12.4%. The People's Bank of China on Aug. 15 unexpectedly cut key policy rates for the second time in two months to support the economy. Chinese banks are due to report their second-quarter earnings later in August.

"The macroeconomic and business outlook are a little slower, particularly the China rebound. It was stronger in the first quarter and became more tepid in the second quarter," Piyush Gupta, CEO of DBS Group Holdings Ltd., said during an Aug. 3 media briefing after the biggest bank in Southeast Asia reported a 48% year-over-year increase in net profit for the second quarter.

"Now whether the new policy actions add some momentum in the second half is anybody's guess. I do not have a strong view," Gupta said.

Central banks on pause

After a series of hikes since early 2022, many central banks in Asia-Pacific have signaled a pause while keeping the option of further hikes open if inflationary pressures persist. The Reserve Bank of Australia left its cash rate unchanged in August after increasing it to 4.1% from 0.1% since May 2022, while the Reserve Bank of India paused in April after raising its reverse repurchase rate to 6.5% through a series of hikes since May 2022.

"The combination of higher inflation and higher interest repayments has meant that real household disposable incomes have fallen around 5% year on year," Commonwealth Bank of Australia CEO Matt Comyn said during the bank's Aug. 9 earnings briefing. "We are very conscious that many Australians are feeling under pressure in the current environment. The rising cost of living is impacting all of our customers."

Comyn expects pressures to ease as inflation and interest rates to start coming down in 2024. "The economy remains fundamentally sound, and stronger than many international markets, and we remain optimistic about the outlook," he said.

Bright spot

In India, which is one of the fastest-growing economies in the world and is expected to reach middle-income status by 2047, an unexpected acceleration in inflation due to soaring prices of vegetables and other food groups, is adding pressure on the central bank to remain hawkish. The Reserve Bank of India said it is prepared to "undertake policy responses, should the situation so warrant."

Still, the South Asian nation's banks are confident that the economic momentum will continue.

State Bank of India Chairman Dinesh Khara. Source: State Bank of India.

"Indian economy continues to exhibit stronger-than-expected growth momentum with robust domestic investment providing the necessary support amid weaker external sector dynamics," Dinesh Khara, chairman of State Bank of India, said during the bank's Aug. 4 results briefing.

"Headwinds from prolonged geopolitical tensions and slowing external demand are the key risks to the outlook. On the banking front, credit growth has continued to grow in double digits and became broad-based across sectors," Khara said.

Indian banks have reported higher net profits in the April-to-June quarter as they benefited from their ability to pass on increased rates for customers while paying less for deposits. But the largest banks may see a decline in earnings as NIMs have stopped rising with the central bank pausing further rate increases.

Sandeep Bakhshi, managing director and CEO of ICICI Bank Ltd., said during the bank's earnings call on July 22 that there are underlying factors that reflect the continuing growth of the economy, "with expansion in manufacturing and services PMI, higher tax collections, real estate buoyancy and resilient urban demand."

Bakhshi said: "Though there has been a pause in the monetary tightening cycle in India, the global and domestic inflation, liquidity and rate environment continues to evolve."