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Fitch: Cyclical Pressure on APAC Banks Easing; High Debt a Risk
July 11, 2017 / 3:27 AM / 15 days ago

Fitch: Cyclical Pressure on APAC Banks Easing; High Debt a Risk

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(The following statement was released by the rating agency) HONG KONG/SINGAPORE, July 10 (Fitch) Some of the cyclical pressures faced by Asia-Pacific (APAC) financial systems are beginning to ease, owing largely to a revival in global trade and a strong start to the year in China. However, high private-sector debt remains a risk to financial system stability and bank performance across much of the region, particularly with US interest rates likely to continue to rise over the next few years. A synchronised improvement in advanced and emerging economies is driving a stronger recovery in global GDP growth and trade volumes. The pick-up in trade has been particularly robust in APAC, led by the policy-driven rise in Chinese demand. Commodity prices have recovered since early 2016, reducing strains in resource-linked sectors, while currencies and asset prices have held up well amid US rate hikes. These trends have helped support bank performance across most of the region. Asset quality, for example, has remained healthier than we had expected. Fitch's sector outlook is still negative for 10 of APAC's 17 rated banking systems, but that is down from 13 at the start of the year. We have removed the negative sector outlooks on Hong Kong and Macau - two economies with particularly close links to China. Our sector outlook on Japan has also been moved to stable from negative, which mirrors a similar change in the sovereign rating. Nevertheless, the build-up in private-sector debt and the rise in property prices over the last decade of ultra-loose global monetary policy have created financial risks that could still be tested by US rate hikes. Thailand, Malaysia, Korea and Singapore stand out as economies where household debt has risen strongly, while corporate debt has soared in Hong Kong and China. Several factors mitigate the risk of an outright financial crisis in China, but a sharp slowdown in its economy is one of the key potential risks facing other APAC banking systems. New and evolving regulations could add to pressures on banks, but will ultimately strengthen financial systems. The main changes will be the agreed phase-in of higher capital requirements and - in Japan's case - higher total loss-absorbing capacity (TLAC) requirements. Fitch expects APAC banks to issue new loss-absorbing capital and debt instruments totalling USD200 billion by end-2018 to meet the requirements. Banks in China, Japan and India will account for most of this issuance. A focus on risk-weight calculations and robustness of models will also keep banks in the more developed markets busy over the next few years. More jurisdictions are likely to implement bail-in legislation, but support is unlikely to disappear in most markets as the authorities remain reluctant to impose losses on senior creditors. Most APAC banking systems are well-positioned to cope with pressures, but the potential for rating changes stemming from asset-quality issues is highest in India and China. In India, where problems are concentrated among state banks, the government appears to be willing to provide capital to stronger banks to support growth, while providing weak banks with only the capital needed to meet minimum requirements - in order to encourage them to downsize and/or consolidate. In China, risks are highest at second- and third-tier banks, which have weaker capital, larger exposure to shadow banking and higher reliance on short-term wholesale funding than the much stronger state banks. These topics will be among the discussion points at the Fitch Global Banking Conference to be held in Hong Kong on 12 July and are also covered in Fitch's recent report, "Regulatory Trends in APAC - July 2017", which can be accessed on www.fitchratings.com or through the link below. Contact: Jonathan Cornish Managing Director Financial Institutions +852 2263 9901 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Sabine Bauer Senior Director Financial Institutions +852 2263 9966 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Regulatory Trends in APAC - July 2017 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 WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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