APAC banks face higher credit losses amid weakening economies – Ratings

Banks in Asia-Pacific face higher credit losses over the next two years as economic growth in the region slows and debt rises, according to an S&P Global Ratings report.

Banks in the region face $425 billion in credit losses in 2022 and $440 billion in 2023, Ratings estimated in an Aug. 4 report. The expected losses are about 23% higher than the rating agency's prior forecasts made in February.

"Global banks face a tougher test on several fronts," Ratings said. "Economic growth prospects are weaker. Inflation is rising, corporate and household leverage is high and stress in the property sector is intensifying."

This combination of factors will challenge the generally stable rating trends across global and Asia-Pacific banking sectors, said S&P Global Ratings credit analyst Gavin Gunning.

Spillover effects

The spillover effects from the war in Ukraine, COVID-19 outbreaks and lockdowns in China, and higher-than-expected inflation have hurt economic conditions in the region, according to the International Monetary Fund. Economic growth in the Asia-Pacific region is expected to slow to 4.2%, versus 6.5% in 2021, the IMF said in a July 28 report.

Ratings expects the impact of the mortgage boycott from Chinese homebuyers to be almost 1 trillion yuan of at-risk loans. Although banks could absorb these bad loans, as it is a small chunk of their loan books, the sentiment could derail sales of other stronger property developers, which would hold back the property sector from recovering.

For the Asia-Pacific region outside China, banks' credit losses may rise to $83 billion in 2022, or about 5% higher than in 2021.

Japanese banks, which posted mixed earnings results for the quarter ended June 30, could be susceptible to weakening credit quality of large domestic borrowers, the report noted.

Banks' balance sheets hold enough buffer to weather potential headwinds, such as higher-for-longer inflation and much weaker economic growth, Ratings said. Asset quality in these lenders remain sound, and bank capital levels have improved since the global financial crisis, it noted.

As of August 3, US$1 was equivalent to 6.76 Chinese yuan.