First COVID-19, now the Russia-Ukraine conflict. A post-pandemic rebound won't be in the sightlines of Asia-Pacific banks anytime soon. Although the industry has only a small exposure to Russia and Ukraine, the fallout will still be felt. Market volatility and higher commodity prices could be just the start.

Asia-Pacific Shielded From Conflict-Related Downgrades--For Now

Our base case is that most Asia-Pacific bank ratings should remain relatively unaffected because of low direct exposure to Russia and Ukraine (see "Asia-Pacific Banks And The Ukraine Crisis: Small Exposures But Secondary Impacts Could Bite," March 15, 2022.) However, the secondary effects on the real economy could hurt borrowers and ultimately raise banks' nonperforming loans (NPLs). Secondary impacts could hit bank ratings or outlooks. In most jurisdictions this is not our base case. However, this is most likely to occur in countries where:

• The economic growth outlook is weaker;
• The economy is a net importer of energy;
• Pre-existing factors contribute to negative headwinds for banks.

As of April 11, 2022, S&P Global Ratings has taken 69 rating actions on financial institutions globally related to the Russia-Ukraine conflict or commodity prices. These have all been for financial institutions based in the EMEA region, primarily Russia (see "Rating Actions Waypoint: The Russia-Ukraine Conflict As Of April 11, 2022," April 12, 2022).

Of the 19 banking jurisdictions where we rate banks in Asia-Pacific, we believe that negative economic trends affecting the stand-alone credit profiles of financial institutions are most likely to take hold in Thailand, Malaysia, Indonesia, and New Zealand. We note, however, that about 85% of bank lending is by the four major Australian-owned banks. The New Zealand subsidiaries of these banks remain on stable outlook.

By contrast, even considering the onset of the Ukraine crisis, positive industry risk trends in Australia and Korea may lead to upgrades for some financial institutions in Australia. For the positive transition to take root in these two countries, headwinds blunting the economic recovery from COVID-19 and the spillover from the Ukraine conflict need to be well managed.

For Chinese banks, the picture is less certain. We still see potential for improving economic risks affecting banks, over the long term, because of lower growth in systemwide leverage and property prices. This scenario is clouded by economic risks in coming months, however. These risks include continuing volatility affecting the property development sector, risks associated with COVID-19, and now the spillover risks from the Ukraine crisis.

Cryptos Won't Blunt The Sting Of Sanctions On Russia

In our view, the pace of regulatory scrutiny on cryptocurrencies will accelerate. Economic and corporate sanctions have obstructed Russia's access to the global financial system, which has consequently caused a spike in demand for cryptocurrencies among Russian residents. Despite this, S&P Global Ratings doesn't believe cryptocurrency use has reached a scale that could alleviate the likely severe consequences of sanctions on the Russian economy (see "Cryptos Won't Blunt The Sting Of Sanctions On Russia," March 04, 2022).

Structural Issues Hamper The Thai Banking Sector

In Thailand, NPLs will be pressing. The systemic risk for the country's banks has risen. There is no immediate fix to the structural issues hampering its lenders and COVID-19 has only inflamed the situation. The fragile and uneven recovery is exacerbated by the economy's high dependence on tourism. We expect the reported NPLs for the Thai banking sector to rise gradually over the next 24 months to 5%--the highest since the global financial crisis (see "Thai Banking Sector's Shaky Recovery: Forbearance, High Debt And Tourism Woes," March 22, 2022).

S&P Global Ratings has lowered its ratings on Siam Commercial Bank Public Co. Ltd. (SCB) and KASIKORNBANK PCL (KBank) to 'BBB' from 'BBB+', and on Krung Thai Bank Public Co. Ltd. (KTB) and TMBThanachart Bank Public Co. Ltd. (TTB) to 'BBB-' from 'BBB'. The downgrades reflect our view that systemic risks have increased for banks operating in Thailand (see table 3).

At the same time, we affirmed our 'BBB+' ratings on Bangkok Bank Public Co. Ltd. and Bank of Ayudhya Public Co. Ltd. (BAY). We have revised down the stand-alone credit profiles of all six banks by one notch. The outlooks on all the banks are stable (see "Four Thai Banks Downgraded As Structural Issues Persist; Outlooks Stable," March 21, 2022.)

Government Backing For China Huarong To Remain Strong

In China, we believe China Huarong Asset Management Co. Ltd. will continue to receive strong government backing and support, despite CITIC Group Corp. replacing the Ministry of Finance (MOF) as the company's largest direct shareholder.

Our view has not changed regarding government support for China Huarong (BBB/Negative/A-2). We see the distressed asset manager as a government-related entity with a very high likelihood of receiving extraordinary government support. Moreover, the new largest shareholder is also state-owned. MOF effectively owns 100% of the CITIC Group (BBB+/Positive/A-2), and therefore remains the ultimate controlling shareholder of China Huarong (see "Bulletin: China Huarong's Government Support Won't Diminish With MOF's Smaller Direct Stake," March 31, 2022.)

Chinese Mega Banks Are On Track

Recent results announced by the Chinese mega-banks are broadly within our rating expectations. For further insights related to Chinese banks latest earnings see entity-specific bulletins in the related research section below.

Table 1

Related Research

Banking Sector Research

• Presentation Delves Into Japan's Complex Corporate Groups, April 05, 2022
• Bulletin: HDFC Bank To Get A Booster Shot After Merger With Parent, April 04, 2022
• Sector And Industry Variables | Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Update: March 2022, March 31, 2022
• Bulletin: Axis Bank's Purchase Of Citi's India Consumer Business Will Boost Its Retail Franchise, March 31, 2022
• Bulletin: Agricultural Bank of China Is Better Protected Against Loan Losses, March 31, 2022
• Bulletin: China Huarong's Government Support Won't Diminish With MOF's Smaller Direct Stake, March 31, 2022
• Bulletin: ICBC's Performance Remains Resilient Amid Uncertainties, March 31, 2022
• Bulletin: China Construction Bank's Sluggish Retail Growth To Weigh On Margins, March 30, 2022
• Bulletin: Bank of China Pivots Back Home Amid Global Uncertainties, March 30, 2022
• Credit FAQ: How The Russia-Ukraine Conflict Is Affecting Ratings And The Global Economy, March 23, 2022
• Thai Banking Sector's Shaky Recovery: Forbearance, High Debt And Tourism Woes, March 22, 2022
• Four Thai Banks Downgraded As Structural Issues Persist; Outlooks Stable, March 21, 2022
• U.S. Financial Institutions Ratings See Some Indirect Increased Risk From The Armed Conflict In Ukraine, March 17, 2022
• Asia-Pacific Banks And The Ukraine Crisis: Small Exposures But Secondary Impacts Could Bite, March 16, 2022
• The Failure Of Sberbank Europe: International In Life, National In Death, March 04, 2022
• Cryptos Won't Blunt The Sting Of Sanctions On Russia, March 04, 2022
• Credit FAQ: ESG Factors And How They Apply To Asia-Pacific Banks - Part 2, March 02, 2022
• Credit FAQ: ESG Factors And How They Apply To Asia-Pacific Banks - Part 1, March 02, 2022
• Mixed Fate For Relief Loans Could Drag On Malaysia's Banking Recovery, Feb. 28, 2022
• Asia-Pacific Financial Institutions Monitor 1Q 2022: Rating Trends Pivot Toward Positive, Feb. 24, 2022
• Global Bank Credit Loss Forecasts: Lower Losses Ahead, Feb. 23, 2022
• Philippine Banking Sector Outlook 2022: Edging Closer To Pre-Pandemic Profitability, Feb. 23, 2022
• Outlook On Japan's Norinchukin Bank Revised Up To Stable On Healthy Capital Buffer; 'A/A-1' Ratings Affirmed, Feb. 21, 2022
• When Rates Rise: Eurozone Bank Earnings Will Too--Especially For Retail, Feb. 17, 2022
• Banks In Emerging Markets: 15 Countries, Three Main Risks (February 2022 Update), Feb. 17, 2022
• Bank of the Philippine Islands Outlook Revised To Stable On An Improving Economy; Rating Affirmed Under Revised Criteria, Feb. 15, 2022
• Korea's Major Commercial Banks Can Better Absorb Credit Losses On Improving Profitability, Feb. 14, 2022
• When Rates Rise: Tighter Monetary Policy Will Provide A Lift To U.S. Banks, Feb. 10, 2022
• Bulletin: Above-System Growth To Fuel Commonwealth Bank of Australia's Earnings, Feb. 09, 2022
• The ECB's Climate Risk Stress Test: Raising The Bar For Banks, Feb. 03, 2022
• The Top Trends Shaping European Bank Ratings In 2022, Jan. 31, 2022
• Banking Industry Country Risk Assessment Update: January 2022, Jan. 28, 2022
• Bulletin: DBS To Strengthen Regional Footprint With Acquisition Of Citi's Taiwan Consumer Business, Jan. 28, 2022
• Ratings On Three Australian And New Zealand Financial Institutions Affirmed Under Revised Criteria, Jan. 28, 2022
• Ratings On Sixteen Australian Mutual Lenders Affirmed Under Revised Criteria, Jan. 28, 2022
• Ratings On Brunei Banks Affirmed Under Revised Criteria, Jan. 27, 2022
• Ratings On Cambodian Banks Affirmed Under Revised Criteria, Jan. 27, 2022
• Ratings Affirmed On Nonbank Financial Institutions in China, Hong Kong Under Revised Criteria, Jan. 27, 2022
• Research Update: Taiwan Cooperative Financial Holding, Taiwan Cooperative Bank Ratings Affirmed Under Revised Criteria; Outlook Unchanged, Jan. 27, 2022
• Ratings On Vietnam Banks Affirmed Under Revised Criteria, Jan. 26, 2022
• Ratings On Seven Japanese Nonbank Financial Institutions Affirmed Under Revised Criteria, Jan. 26, 2022
• Ratings On Six Indian Banks Affirmed Under Revised Criteria, Jan. 25, 2022
• Ratings On Four Indian Nonbank Finance Companies Affirmed Under Revised Criteria, Jan. 25, 2022
• Research Update: Axis Bank Outlook Revised To Positive On Improving Asset Quality; 'BB+/B' Ratings Affirmed Under Revised Criteria, Jan. 25, 2022
• Asia-Pacific Banks Outlook 2022: The Long And Winding Road (To COVID Recovery), Jan. 25, 2022
• Ratings On Taiwan-Based Securities Brokers Affirmed Under Revised Criteria, Jan. 24, 2022
• Japan Bank Outlook 2022: Look Beneath The Surface, Jan. 24, 2022
• Ratings On Three Major Securities Firms In Korea Affirmed Under Revised Criteria, Jan. 21, 2022
• Malaysian Banks Ratings Affirmed Under Revised Criteria, Jan. 21, 2022
• Ratings On Seven Australian And New Zealand Regional Banks Affirmed Under Revised Criteria, Jan. 21, 2022
• Ratings On Indonesia Financial Institutions Affirmed Under Revised Criteria, Jan. 21, 2022
• Singapore Banks Ratings Affirmed Under Revised Criteria, Jan. 20, 2022
• Chinese And Hong Kong Securities Brokers Ratings Affirmed Under Revised Financial Institutions Criteria, Jan. 20, 2022
• Ratings On Six Hong Kong Banks Affirmed Under Revised Criteria, Jan. 20, 2022
• Ratings On Thai Banks Affirmed Under Revised Criteria, Jan. 20, 2022
• Australia In 2022: Omicron Adds Bumps On The Road To Recovery, Jan. 20, 2022
• ESG Credit Indicator Report Card: Asia-Pacific Banks, Jan. 19, 2022
• Ratings On 11 Local Chinese Banks Affirmed Under Revised Financial Institutions Criteria, Jan. 18, 2022
• Selected Taiwan-Based Bank Ratings Affirmed Under Revised Criteria, Jan. 18, 2022
• Ratings On Six Korean Government-Related Financial Institutions Affirmed Under Revised Criteria, Jan. 14, 2022
• Bulletin: UOB's Acquisition Will Strengthen Its Retail Presence In Southeast Asia, Jan. 14, 2022
• Ratings On Two Korean Regional Banks Affirmed Under Revised Criteria, Jan. 14, 2022
• Global FMI Sector Outlook 2022: Growth Initiatives Will Be Key To Increasing Earnings, Jan. 13, 2022
• Selected Taiwan-Based Bank Ratings Affirmed Under Revised Criteria, Jan. 11, 2022
• Research Update: Ratings On Industrial and Commercial Bank Of China, Most Subsidiaries Affirmed Under Revised Criteria; Outlooks Stable, Jan. 10, 2022
• Research Update: State Bank of India Ratings Affirmed Under Revised Criteria; Outlook Stable, Jan. 07, 2022
• Robust Economy Underpins Stable Credit Outlook For Taiwan In 2022, Jan. 06, 2022

Economic Research

• Global Economic Outlook Q2 2022: No Cause For Complacency As The Russia-Ukraine Conflict Modestly Dents Growth, March 31, 2022
• Economic Outlook Emerging Markets Q2 2022: Growth Slows Amid Higher Commodity Price Inflation, March 29, 2022
• Economic Research: Asia-Pacific Economic Risks, Thy Name Is Inflation, March 28, 2022
• Economic Research: Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict, March 08, 2022
• Economic Research: What Higher Energy Prices Mean For Emerging Markets, March 04, 2022
• Economic Research: The Post-Pandemic Fiscal Consolidation Narrative is Incomplete, Feb. 24, 2022

Sovereign, Credit Markets And Other Research

• Credit Conditions: Emerging Markets Q2 2022: Conflict Exacerbates Risks, March 29, 2022
• Credit Conditions: Asia-Pacific Q2 2022: A Divide Takes Shape, March 29, 2022
• Credit FAQ: COVID And Conflict Strain Asia-Pacific Sovereigns, March 24, 2022
• Credit FAQ: China's Soft Landing May Come With Surprises, March 11, 2022
• Credit FAQ: Ukraine Conflict And Asian Companies: Commodity Prices, Sentiment Exceed Direct Effects, March 10, 2022
• Credit FAQ Looks At Signaling From China's National Party Congress, March 10, 2022
• Credit FAQ: What Does China's 2022 National Party Congress Say About Policy Direction?, March 10, 2022
• Ukraine Conflict Divides Asia's Energy Haves And Have-Nots, March 09, 2022
• Credit FAQ: Rest Of Asia To Delink From China In 2022, March 09, 2022
• Credit FAQ: Asia's Green Boom Pushes Scrutiny, Standards, March 03, 2022
• Cyber Threat Brief: How Worried Should We Be About Cyber Attacks On Ukraine?, Feb. 22, 2022
• The Rise Of South And Southeast Asia Unicorns: Cash Burn Disrupts Credit Quality , Feb. 21, 2022
• Emerging Markets Monthly Highlights: Geopolitical Tensions Heighten Risks, Feb. 16, 2022
• Auditor Resignations Flag Governance Risk For China Developers, Feb. 16, 2022
• Corporate Top Trends Update: Asia-Pacific Credit Outlook 2022, Feb. 14, 2022
• A Credit-Cycle Turn Could Expose Vulnerabilities In The Middle Market, Feb. 09, 2022
• Global Credit Conditions Special Update: Geopolitical, Inflation, And Rate Risks Rise, Feb. 08, 2022
• Credit Trends: 'BBB' Pulse Quarterly: Key Themes Shaping 2022, Feb. 04, 2022
• Credit Trends: Global Refinancing--Companies Position For Rising Rates By Lengthening Maturity Walls, Feb. 03, 2022
• Credit Trends: Global Financing Conditions: Bond Issuance Looks Set To Contract 2% This Year As Monetary Policy Tightens, Jan. 31, 2022
• Global Sovereign Rating Trends 2022: Despite Stabilization, The Pandemic Threatens The Recovery, Jan. 27, 2022
• Asia-Pacific Sovereign Rating Trends 2022: New COVID Strain Thwarts An Earlier Recovery, Jan. 27, 2022
• As The Escrow Flies: China Developers Navigate Convoluted Rules On Presales, Jan. 20, 2022

Ratings Methodology News

• General Criteria: Hybrid Capital: Methodology And Assumptions, March 02, 2022

Webcasts: Asia-Pacific Banking Insights

In the last quarter, we have held the following webcasts to share our views on Asia-Pacific and other banking topics. The replays are available on

https://www.spglobal.com/ratings/en/events/webcast-replays/index#

• Asia-Pacific Banking Update: Russia-Ukraine Conflict And Other Latest Developments Impacting Banks, March 16, 2022
• What's Behind S&P Global Ratings' Recent Rating Action On Philippine Banks?, Feb. 16, 2022
• Asia-Pacific Banks Outlook 2022: The Long And Winding Road To COVID Recovery, Jan. 25, 2022

Recent BICRA Changes And Full Reports

Over the past quarter (through March 31, 2022), we have made the following changes to our Banking Industry Country Risk Assessments (BICRAs) in the Asia-Pacific region.

Thailand

We have revised our BICRA for Thailand to Group '7' from Group '6', and our industry risk score to '6' from '5'. Systemic risk for Thailand's banks has risen and high leverage among borrowers is likely to persist for longer than we previously expected. Regulatory relaxation, such as a loosening of loan-to-value ratio requirements for mortgages, or an absence of any concrete action to rein in high household debt would delay a resolution of structural issues, in our view. In addition, the economic recovery remains fragile and uneven across sectors, especially in tourism, which remains well below pre-pandemic levels. The crisis in Ukraine could also further delay the normalization of international tourist arrivals in Thailand. Steps taken by the government and central bank should reduce risks for the country's banks, but they won't eliminate them. We view Thailand's relief programs (including loan classification norms) as more liberal than those of peer countries. There is an increasing divergence in economic reality and reported asset quality ratios. The banking sector's reported NPL ratio has remained relatively stable at about 3%, supported by ongoing relief measures. In our opinion, regulatory forbearance is just prolonging the pain of underlying problem loans. At 14%, the high proportion of banks' loan books under relief measures points to incipient problems in the system. Our base case projects an orderly unwinding of imbalances. We expect the Thai banking sector's NPLs to rise gradually over the next 24 months to 5%--the highest since the 2008 global financial crisis. Indeed, it may take longer. Restructuring would provide a temporary lifeline to the borrowers and slow NPL growth. But it will not resolve the structural problems in the system. In the absence of any effective measures to reduce the high household debt burden, borrowers will remain dependent on better economic conditions and low interest rates to service their obligations on time.

Philippines

We have revised our economic risk trend for the Philippines to stable from negative. Philippines' ratio of restructured loans is significantly lower than that of regional peers such as Indonesia, Malaysia, and Thailand. Some slippage is possible from the restructured pool, especially from the services sector and from stretched consumers. We believe Philippine banks are well placed to absorb this residual stress given their improved capitalization and adequate provisioning coverage. Overall, we believe the banking sector's NPL ratio has peaked and is likely to gradually decline, supported by recoveries and write-offs. We note that pandemic-containment measures have become more calibrated, with authorities imposing vaccine differentiated measures rather than complete lockdowns. This has resulted in a more manageable impact on economic activity. Potential new coronavirus outbreaks of unknown severity could cast a shadow on this. A reimposition of strict mobility curbs will hurt businesses and consumers, resulting in further asset quality pain for the banking sector.

The table below presents S&P Global Ratings' views about key risks and risk trends for banking sectors in Asia-Pacific countries where we rate banks. For more detailed information, please refer to the latest BICRA on a given country. According to our methodology, BICRAs fall into groups from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

Chart 1

Chart 2

Chart 3

Table 2

Table 3: Recent Rating Actions: Asia-Pacific Banks

Design: Evy Cheung; editing: Lex Hall