Asia Pacific Banks set on financial recovery

World Bank Prospects Group Director Ayhan Kose described the world recession plunged by the Covid crisis as “singular in many respects and is likely to be the deepest one in advanced economies since the Second World War and the first output contraction in emerging and developing economies in at least the past six decades”.  After a year of disruption and slowdown, there can be a sustained growth and economic recovery suggesting that 2021 is likely to be a better year than 2020. If sustained by strong national fiscal and monetary policies as well as coordinated regional trade enhancement measures that will provide financial relief to drive the growth of the region through employment. A good example is the Regional Comprehensive Economic Partnership (RCEP) signed by the 10 member countries of ASEAN, Australia, China, Japan, New Zealand, and South Korea.

Helen Qiao, head of APAC Economics at Bank of America Global Research expects the RCEP to open a new window for more comprehensive regional supply chain over the medium-term and set the stage for closer regional economic integration. Her thoughts were, “In particular, we expect trade with China and ASEAN around intermediate goods and final goods to further accelerate with the ratification of RCEP, in addition to ASEAN being China’s largest trading partner as of first half of 2020. At the same time, RCEP could also accelerate separate bilateral/multilateral free trade agreement (FTA) procedures within the bloc such as China-Korea-Japan FTA.” The regional recovery process was started with the effective corona virus vaccine points as the historical low interest rates were the result of these quantitative easing and economic stimulus measures. But recovery in Asia Pacific (APAC) will be an uneven K-shaped one where some sectors of the economy less affected by COVID-19 will recover and grow faster than others. Uneven economic recovery in APAC might result in banking systems in the region will also recover at different speeds, while problem loans will increase moderately. Gross domestic product (GDP) to contract or significantly slow in 2020 in APAC economies, followed by recovery in 2021 that will generally result in GDP remaining below its pre-pandemic level. 

“As such, asset risks for banks will grow substantially. Loans that will deteriorate the most in quality include unsecured personal loans, vehicle loans and loans to small and medium sized enterprises (SME) and large corporates active in industries disrupted by the pandemic the most, such as transportation, hospitality, leisure, retail and some commodities,” remarked Moody’s senior credit officer for financial Institutions, Eugene Tarzimanov. Non-performing loan (NPL) growth will be the mildest in South Korea, Japan and Vietnam. This is partly because economic damage has been less significant in the case of South Korea and Vietnam, while traditionally strong underwriting practices are paying off for Japanese banks during this downturn.

“We estimate that APAC banks’ preprovision income will decline 5%-10% in 2020 from 2019 before recovering modestly in 2021-2022. The combination of higher credit costs and lower revenue will drag down APAC banks’ average ROTA by about 50 basis points by 2022 from 0.9% in 2019. At the onset of the coronavirus crisis, banks in Indonesia had the highest average ROTA, while those in Japan and India had the lowest. The stronger a bank’s profitability, the better its first line of defense against credit losses, which explains why Indonesian banks have the highest capital ratios Key variables for our projection are when banks will recognize new NPLs and how actively they will book lifetime expected credit losses (ECL) under IFRS 9, except in Japan, India, Vietnam and Bangladesh, which have not adopted the accounting standard. Regulators in many APAC economies have allowed the banks to create ECLs gradually, which should smoothen the impact of higher provisions on bank earnings.’’ said Tarzimanov.

Government support can be expected in India and China – particularly for state-owned and systemically important banks. “We also expect liquidity to be most stable for the largest banks in each system, but risks becoming more stretched for smaller, faster-growing banks where deposits may not keep pace with asset growth,” said Cornish, Head of APAC banks, Fitch. Challenges to keep the capital levels above minimum regulatory requirements will be greater in India, China, Vietnam, and Sri Lanka.