For Asia-Pacific banks, the lack of material direct exposures to Russia and Ukraine counterparties will soften the impact of the conflict. But proximate downside risks--in particular, actual and potential secondary economic and other risks--lie ahead. The biggest risk of the Ukraine conflict is market volatility and higher commodity prices; emerging economies with large energy imports are most at risk. A widening of the conflict or further sanctions could push investors to haven positions, involving capital outflow from emerging markets, hitting assets and currencies (see "Ukraine Conflict Divides Asia's Energy Haves And Have-Nots," published March 9, 2022). Banks will face a test in managing the spillover from these and other risks, and the effects will be uneven across Asia-Pacific's 19 banking systems where we have ratings.

Barring a negative step-change in the Ukraine conflict, some Asia-Pacific banking systems may be relatively unaffected. Ratings and rating outlooks in these jurisdictions will likely remain unchanged. For others the future looks a bit less certain. This applies to those with less ratings flexibility because of negative economic or industry risk baggage affecting banks heading into the crisis. These jurisdictions include Thailand, Malaysia, and Indonesia.

Small Exposure Will Temper The Spillover Effects

Direct exposures to Russia of Asia-Pacific banks appear manageable. Asia-Pacific financial institutions have low direct exposure to Russia (see chart 1). Total Japanese banking exposure to Russia was a low US$9 billion as of Sept. 30, 2021--less than 0.2% of banking assets. Direct exposures in some other banking jurisdictions, including Australia, Korea and Taiwan, are barely a blip.

Chart 1

The Russia-Ukraine conflict has triggered a batch of negative rating actions on banks in Russia, Ukraine and Belarus in the past few weeks (see "How The Conflict In Ukraine Is Affecting Financial Institutions Ratings," published March 4, 2022). Our base case is that most Asia-Pacific bank ratings should remain relatively unaffected because of low exposures to Russia and Ukraine. However, the secondary effects on the real economy and corporates could raise banks' nonperforming loans.

Economic Fate: Oil Prices Are A Key

Most banks should contend with the negative knock-on effects on their borrowers at current rating levels but will feel the effects of the conflict unevenly. For the many economies in Asia-Pacific that are net energy importers, higher energy prices can trigger a terms-of-trade shock. This would hit current account balances and real domestic consumption and investment. This dynamic would be most keenly felt by the largest net energy importers (relative to GDP): India, the Philippines, Korea, Taiwan, and Thailand. Some bank borrowers in these jurisdictions will feel the pain, which will hinder bank asset quality. Higher energy prices would be a plus for some of Asia-Pacific's net energy exporters: Indonesia, Malaysia and, especially, Australia.

Furthermore, S&P Global Ratings has revised its preliminary GDP and inflation forecasts, including for key Asia-Pacific economies, to reflect recent developments. This offers insights for our view on economic risks affecting banks (see Table 1).

Table 1

Second-Order Impacts May Come To The Fore

While economic downside scenarios could worsen, so too could geopolitical risks and event risks including cyberattacks. Spillover effects from outside Asia-Pacific could also eventually take their toll on Asia-Pacific banks' asset quality. In addition to recent revisions on some Asia-Pacific economies, preliminary GDP growth forecasts were revised negatively for the U.S., and the Eurozone (see Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict, published March, 8, 2022).

Noted also are that banks' starting points vary prior to the onset of the Russian-Ukraine crisis. Economic trends are negative in Malaysia, Indonesia, and Thailand, indicating less flexibility to contend with fresh stress from the Russia-Ukraine conflict. Our view of the effects of long-term economic trends on the Chinese banking sector is more positive. However, China must now deal with the economic uncertainties of this conflict alongside significant immediate stress emanating from a weak property sector.

We outline below the potential impact on individual banking systems.

Table 2

Selected Asia-Pacific Banking Jurisdictions: Direct Exposures Are Uniformly Low But The Fallout Could Be Profound

Australia

Based on Reserve Bank of Australia (RBA) and Bank of International Settlements (BIS) reports, and our analysis of the larger Australian banks, we understand that the Australian banks have minimal direct exposures in Russia, Ukraine, and Belarus. The Australian banks' claims on entities in these countries are less than A$10 million in total.

Given the Australian banks significant dependence on offshore borrowings, we consider the main fallout for the Australian banks could be a global financial market dislocation, leading disruption in their access to global funding and a rise in the cost of funding.

Australian banks have started to re-enter the global funding markets after a COVID-19-driven hiatus --strong deposit flows and RBA funding support meaning they didn't much additional funding in the past two years. Pass through of increased funding costs to borrowers from Australian banks could also push up banks' credit losses. More leveraged borrowers would struggle to service higher interest burden.

Nevertheless, based on the past record (the COVID-19 period as well as the global financial crisis of 2007-2009), we expect that the Australian government and RBA would support Australian bank funding, if needed.

(Contact: Sharad Jain; sharad.jain@spglobal.com)

China

The Chinese banking system is very large with Chinese renminbi (RMB) 345 trillion (US$54.2 trillion) of total assets at end-2021. More than 95% of this is domestically domiciled. While Russia is a comprehensive strategic partner and a collaborative country under China's Belt and Road Initiative (BRI), banking sector exposures are not significant as a proportion to banking sector assets. In addition, absolute amounts could still be sizeable. In particular, infrastructure projects where certain Chinese policy banks tend to have a higher participation. Russia ranked 11th among the countries and jurisdictions with which China traded in 2021. It accounted for US$67.6 billion (~2%) of China's exports and US$79.3 billion (~3%) of China's imports. The main traded products were electronics and fossil fuels. Trade receivables at any one time may be smaller than annual trade flows given their short loan maturities. We notice there have been notable trades in recent years using local currencies as opposed to the US dollar or euro. China's level of exports and imports to Ukraine is much smaller at 0.28% and 0.37%, respectively. We expect Chinese financial institutions to continue to support national strategies while complying with domestic and international sanction rules. The latter is evolving quickly and Chinese financial institutions, particularly those with more significant international presence, would have to address these swiftly, as would other multinational financial institutions.

(Contact: Harry Hu; harry.hu@spglobal.com; Ming Tan; ming.tan@spglobal.com)

Hong Kong

The direct impact of the Russia-Ukraine war on Hong Kong banks would likely be minimal as banks have very low exposure to these two countries. Specifically, the Hong Kong Monetary Authority reported about Hong Kong dollars (HK$) 2.6 billion (US$333 million) exposure to Russia for Hong Kong banks, which is equivalent to about 0.01% of the banking system assets. There is no Russian bank that is an authorized institution or has a local representative office in Hong Kong.

Banks in Hong Kong have actively reduced their higher risk exposure to the oil and gas sector since the start of the pandemic, reducing their sensitivity to potential volatility in oil and gas prices. However, if geopolitical uncertainties lead to slower U.S. Fed interest rate hikes or global economic growth, we could see a drag in profit recovery for Hong Kong banks.

(Contact: Fern Wang; fern.wang@spglobal.com)

Japan

The Japanese banking system, which includes three global systemically important banks, has limited direct exposure to Russia. Total Japanese banking exposures to Russia equate to a paltry US$9 billion as of Sept. 30, 2021, according to BIS data. This accounts for only about 0.2% of systemwide Japanese loan exposures.

However, we now see much volatility in global financial and commodity markets. Japan is a net importer of oil and liquefied natural gas, so a hike in energy prices could slow economic growth by dampening demand for services and industry products via cost-push inflation, as may be the case in Europe. The key risk is that the turmoil affects Japan's macroeconomy and the creditworthiness of Japanese banks, which are closely tied to global financial and commodity markets.

(Contact: Ryoji Yoshizawa; ryoji.yoshizawa@spglobal.com)

Korea

Korean banks have very small direct exposures to either Russia or Ukraine. Rather, we see potential indirect impact on the banks if the conflict raises uncertainties around global economic growth. The banks could face modest pressure on their asset quality from those exporters or importers related to these countries. The financial authority announced an emergency aid program of up to Korean won 2 trillion (US$1.6 billion) to support these companies if needed. We anticipate the banks will be able to manage foreign-currency funding and liquidity risks in the event of a potential increase in financial market volatility, as demonstrated in 2020 during the onset of the pandemic. Our view is based on the bank's good record of risk management and close regulatory oversight.

(Contact: Daehyun Kim; daehyun.kim@spglobal.com)

South And Southeast Asia

Banks in South and Southeast Asia (SSEA) banks do not have meaningful exposures, direct or otherwise, to Russia. Higher oil prices, if sustained, would benefit Brunei, where revenue from the petroleum sector accounts for more than half of GDP and is supportive of the borrowers' financial profile of rated banks whose exposures are almost wholly domestic. Net commodity exporting countries such as Malaysia and Indonesia will also benefit, albeit to a lesser extent. Most other SSEA economies are net importers of oil and commodities, and higher inflation might dampen--but not derail--economic growth and domestic consumption. India and Thailand are large oil importers and will be the most affected among large Asia-Pacific countries.

Geopolitical uncertainties might slow interest rate hikes, which would have a two-pronged impact. On the slightly negative side, it will blunt net interest margins upside from upward repricing for SSEA banks, whose portfolios are heavily weighted toward floating rate loans. On the positive side, slower rate hikes would mitigate credit risk stress, particularly for banking sectors that are slower to recover from COVID-19, with a high level of restructured loans, for instance in Indonesia and Thailand.

Emerging market outflows and currency volatility could affect Indonesian corporates. Large Indonesian corporates have over half of their liabilities in U.S. dollars and a meaningful portion is not completely hedged. These remain exposed to rupiah volatility.

(Contact: Ivan Tan; ivan.tan@spglobal.com; Geeta Chugh; geeta.chugh@spglobal.com)

Taiwan

The Russian exposure for Taiwan's banking system is about US$182 million, 0.01% of the sector's total assets or 0.12% of the sector's total equity. We see no active relationships between the Taiwanese banks and Russian counterparties. Retail consumers' Russian exposure via overseas mutuals fund is also limited.

(Contact: Andy Chang; andy.chang@spglobal.com)

Related Research

• Ukraine Conflict Divides Asia's Energy Haves And Have-Nots, March 9, 2022
• Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict, March 8, 2022
• How The Conflict In Ukraine Is Affecting Financial Institutions Ratings, March 4, 2022
• Credit FAQ: The Significance Of Some Russian Banks Being Excluded From The SWIFT System, March 4, 2022
• The Failure Of Sberbank Europe: International In Life, National In Death, March 4, 2022
• Cryptos Won't Blunt The Sting Of Sanctions On Russia, March 4, 2022

Editing: Lex Hall

Design: Evy Cheung