Quotes of the Quarter: APAC bankers expect volatility to stay amid rising rates

Asia-Pacific banks talk about rising inflation and tighter monetary policies. Source: owngarden/E+ via Getty Images

Top bankers in Asia-Pacific expect markets to remain volatile for some time, as policy rate hikes, rising inflation and the Russia-Ukraine war weigh on sentiment.

Bank executives discussed the effects of higher interest rates and inflation on their businesses during earnings calls for the quarter ended Sept. 30. In addition to market uncertainty, the executives expect more monetary policy tightening as central banks stay focused on inflation control.

"What's more important is the [U.S. Federal Reserve's] body language, and the Fed statements are quite clear," DBS Group Holdings Ltd. CEO Piyush Gupta said during a Nov. 3 analyst call. "I mean they're not leveling — not really leveling off at 3.5%. I think they will definitely wind up at 4.5% this year and probably our current base case is 4.75%, but they could even see through that. And, therefore, do you wind up with a slowdown only in the U.S. or a recession is anybody's guess."

Gupta said the U.S. could enter a recession if rates hit north of 5%. "And therefore, you will see a sharper slowdown in Asia if that is the case," the CEO added. Gupta's comments came after the Fed on Nov. 2 raised interest rates by 75 basis points for the fourth consecutive time this year, bringing the benchmark federal funds rate to between 3.75% and 4%.

Most Asia-Pacific central banks followed the Fed in raising rates to control inflation and keep their currencies stable. Still, more rate hikes are widely expected, as macro headwinds continue to cloud the growth outlook. The IMF in late October cut its growth forecasts for Asia-Pacific to 4% for 2022 and 4.3% for 2023, down 0.9 percentage point and 0.8 percentage point, respectively, citing global financial tightening, the war in Ukraine and the sharp slowdown of the Chinese economy.

The Bank of Japan and the People's Bank of China are taking divergent approaches to monetary policy though. Japan has held monetary policy steady in the face of the yen's decline, while China has lowered rates to spur economic growth.

Cautious, watchful

Executives at most of the region's top banks were unanimous in urging caution as downside risks continue to cloud the outlook. Oversea-Chinese Banking Corp. Ltd. CEO Helen Wong remained optimistic about the Singaporean lender's resilience but said recession risks are still high.

"We stay cautious on near-term vulnerabilities from developed markets, which could have a tender impact on the overall asset quality, growing divergence in growth indeed, and inflation outcome is yet to be seen. So that is rising risk of policy miscalibration by central banks to tame the inflation," Wong said.

Wong said recession risks remain elevated in Europe and the U.S., and the bank will remain watchful in case the risks spill over to the Asian economies. United Overseas Bank Ltd. Deputy Chairman and CEO Wee Ee Cheong said the global economic outlook remains challenging, but Wee does not expect an impending recession in the bank's key markets "if there is an orderly foreign exchange and interest rate movement."

In its third-quarter results statement, China Construction Bank Corp. said the economic and financial landscape remained complex and challenging and economic recovery continued to slow down in the quarter due to geopolitical tensions, inflation, the COVID-19 pandemic and deglobalization.

Japanese megabanks' executives also saw a challenging outlook ahead. "The [market] outlook [for the fiscal second half that started in October] is more uncertain than in the fiscal half ... there is a possibility that we could be affected by a recession in the U.S.," Sumitomo Mitsui Financial Group Inc. CEO Jun Ohta said.

Most Asia-Pacific banking systems are resilient enough to withstand downside risks, but the stand-alone financial profiles of financial institutions in Indonesia, Thailand and New Zealand may face a greater challenge, S&P Global Ratings said in an Oct. 10 report. According to the rating agency, the outlook on issuer credit ratings for systemically important banks in these jurisdictions is stable as they are backed by governments or highly rated parent banks.

Margin benefit, loan growth

Amid all the uncertainty, executives expect the continued rise in policy rates to benefit banks' net interest margins.

"I think we'll continue to benefit from the rate hikes that are coming through in U.S. dollar rates as well as in New Zealand dollar rates," Australia and New Zealand Banking Group Ltd. CFO Farhan Faruqui said.

Westpac Banking Corp. CFO Michael Rowland expects a rise in margins in the first fiscal half, given the bank's exit margin and the likely rise in interest rates.

"Looking forward, we expect further upside from the higher interest rates in FY'23," National Australia Bank Ltd. group CFO Gary Lennon said. "On our unhedged low-rate deposits, we expect the benefit to NIM from cash rate increases to peak in the first half of 2023 with more modest upside thereafter."

In India, bank executives sounded optimistic about the outlook though, given stronger credit growth and better growth prospects for the local economy. Most Indian banks posted net profits for the quarter ended Sept. 30, with HDFC Bank Ltd., ICICI Bank Ltd. and State Bank of India attributing higher profits to strong loan growth.

"We believe that the continued recovery in domestic demand boosted with the onset of the festive season and higher government capex provide support to the growth. While there are risks coming from the possibility of a global slowdown, higher inflationary pressure and an uneven monsoon, consumer demand and fiscal spends are likely to keep the economy stimulated," said HDFC Bank CFO Srinivasan Vaidyanathan.

State Bank of India Chairman Dinesh Khara said the Indian economy has shown resilience and credit growth in the banking system has continued to grow in double-digits in this fiscal year. "With economic activity gaining momentum, there will be an optimistic outlook for the demand conditions, and we expect credit growth to continue in the near term," Khara said.