December 17, 2014 / 2:01 AM / 3 years ago

Fitch: China Rebalancing, Slowing Growth Key Risks for APAC Banks in 2015

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 2015 Outlook: Asia-Pacific Banks here SINGAPORE, December 16 (Fitch) The rebalancing of China's economy and slowing growth in economies in Asia-Pacific (APAC) are likely to feature as key risks for banks in the region in the year ahead, Fitch Ratings says in two new reports. There are more banking systems with stable sector outlooks for 2015 than in 2014, despite pressures inhibiting growth, principally emanating from China. Negative sector outlooks relate to China and some countries in emerging Asia, and they reflect challenges from slowing economic growth, loan book seasoning after an extended period of rapid growth and a combination of asset quality and capital issues. Challenges faced by the Chinese financial system will continue to build in 2015 as the government works to rebalance economic growth away from investment and towards private consumption. GDP growth is currently projected to slow to 6.8% in 2015 and 6.5% in 2016, while credit/GDP will continue its unsustainable expansion to a forecast 260% at end-2015, even though credit growth will slow. At the same time, the pressure on Chinese banks' asset quality will continue to build - particularly those extended to property, manufacturing and other industries burdened by overcapacity. These risks and on-going financial sector liberalisation will lead to a profit squeeze for the banks and drive a need for fresh bank capital in China. A slowing China will also weigh on the region's prospects, with credit growth likely to also wane. Fitch views slower credit growth positively as it would help prevent overheating of some markets. But increased economic vulnerabilities may expose excessive risk that has been built up, triggering more material credit loses. Rising direct exposure to China by APAC banks means there is an increased likelihood of risks being transmitted to regional financial centres such as Hong Kong/Macau, Singapore, and increasingly, Taiwan. Other markets to watch include Thailand and Malaysia due to rising household debt. Lower inflation helped by reduced oil prices and monetary easing raise the possibility of lower interest rates for some markets, which will provide respite from asset-quality pressures. India's improved political and economic conditions, with GDP growth forecast at 5.6% in the fiscal year ending March 2015 (FY15) and 6.5% in FY16 has helped stabilise the prospects for Indian banks. While stressed assets will peak in early 2015, they remain high and the capital needs among banks, primarily the public sector banks, is large at around USD200bn as they migrate towards the Basel III framework. Similarly, banks in the Philippines and Sri Lanka are likely to benefit from buoyant economies. The fundamentals of most APAC banks are healthy with earnings and capital buffers adequate to offset higher credit costs, while funding and liquidity profiles are comfortable to absorb currency pressures. That said, Fitch expects capital raising by the regions' banks to gain momentum as issuers respond to both market and global regulatory trends. Chinese and Indian bank capital needs are the greatest and other systems such as Mongolia, Vietnam and Sri Lanka are also considered under-capitalised. Internationally active APAC banks in more advanced systems such as Australia, Hong Kong, Japan and Singapore will likely raise capital in response to the higher market thresholds set by, in particular, the global banks and measures announced by the Financial Stability Board. For South Korea, the sector outlook remains negative given an unsupportive regulatory, social and political environment. An ageing population adds to the challenges faced by banks in South Korea. In Japan, the uncertainties around the future success of the country's economic reforms will put a damper on the operating environment for the country's major banks, whose earnings have been buoyed by optimism around "Abenomics". Domestic operations still dominate the Japanese mega banks' revenues and assets, and so Fitch anticipates the banks pushing ahead with offshore expansion - organic and inorganic - to boost profitability. However, such expansion is likely to entail additional risk, as the banks expand their interests primarily in emerging markets. The reports "2015 Outlook: Asia-Pacific Banks" and "APAC Banks Dashboard - Outlook 2015" are available at www.fitchratings.com or by clicking on the links in this media release. Contact: Mark Young Managing Director, Financial Institutions +65 6796 7229 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Jonathan Cornish, Managing Director, Financial Institutions +852 2263 9901 Ambreesh Srivastava, Senior Director, Financial Institutions +65 6796 7218 Tim Roche Senior Director, Financial Institutions +612 8256 0310 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria and Related Research: Asia-Pacific Banks Dashboard - 2015 Outlook here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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