Asia-Pacific banks may have needed to pay higher interest rates on new bonds following recent downgrades of their credit ratings and outlook, but the near-term impact on their funding costs is likely limited due to accommodating monetary conditions.

As the effects of the novel coronavirus pandemic are felt across the world, S&P Global Ratings, Moody's and Fitch Ratings have cut credit ratings and outlooks on some banking institutions in Asia-Pacific to reflect the growing uncertainties they face.

"The banking systems in all of these countries are flush with liquidity," said Nikita Anand, associate director at S&P Global Ratings. "Since growth opportunities are limited at this point, [banks] may not need funds and are likely to postpone fundraising plans [until] markets are better."

S&P Global Ratings estimates that COVID-19 could result in a US$300 billion increase in credit costs for Asia-Pacific banking institutions and a US$600 billion rise in nonperforming assets in 2020, according to an April 6 report. Rating downgrades are likely to outnumber upgrades for Asia-Pacific banks in 2020, it said.

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Moody's has a negative outlook on 16 banking systems in Asia as the economic downturn and weaker prospects will translate into a more adverse credit conditions in 2020 and 2021. Banks' profitability will also likely decline due to higher loan-loss provisions from deteriorating asset quality, it said in an April 21 report.

Fitch, as of March 20, has downgraded the outlook on 17 Asia-Pacific banking systems to negative as weaker economic growth crimps credit demand. Further risks for Asian banks will arise from the pandemic's impact on international funding and liquidity, Fitch added.

Supportive governments

While a negative outlook on banks' ratings may make them unattractive to investors, lenders in the region may not have immediate needs to raise funds due to government support.

"If you see the central bank actions, and fiscal stimulus from the government, the common factor there is to make sure the banking system is liquid enough," Anand said. The authorities have taken steps to provide them with enough liquidity so that they can support companies and nonbanking financial institutions.

Central banks have aggressively cut rates and some have started quantitative easing measures to increase liquidity in the financial markets. The Reserve Bank of Australia and the Reserve Bank of New Zealand have both pledged to buy back government bonds for the first time. The People's Bank of China cut the reserve requirement ratio on small banks by 50 basis points on April 15 and plans to cut another 50 basis points on May 15 to release around 400 billion yuan.

The negative ratings, however, would hurt banks planning to raise funds overseas more than entities looking for domestic funding, said Krishnan Sitaraman, senior director at India's CRISIL Ratings.

"I don't see Indian banks looking at overseas fund raising in any material way now. Anyway, in the current environment, liquidity is surplus for the banking system and credit growth is lower than deposit growth."

Anand said: "I think larger banks with stronger credit profiles will find it easier to tap international markets as compared to smaller ones with weaker credit profiles. The latter may have to pay premiums to raise debt at this time as risk aversion remains high."

She said most South and Southeast Asian banking systems are primarily deposit-funded and rely less on wholesale funding sources such as federal funds, foreign deposits and brokered deposits.

Even for banks that rely on wholesale funding sources, such as Japanese lenders, liquidity support from central banks has helped them weather the tighter funding conditions, according to an S&P Global Ratings report. Japanese banks tend to have significant equity holdings and they have been hurt by stock selloffs, according to the report. But the impact has been mitigated by a rally in U.S. Treasurys as Japanese banks also have substantial holdings of that debt.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.