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China's property woes, sagging growth in Southeast Asia pose risks to banks

Banks in some Asia-Pacific countries face downside risks as a shaky Chinese property sector and slower economic growth in Southeast Asia threaten the stabilizing outlook for lenders, according to S&P Global Ratings.

While its net rating outlook bias for banks in the Asia-Pacific region improved to about negative 1% as of Aug. 31, from negative 6% at the end of May, Ratings flagged the shaky Chinese property sector and lower growth forecasts in Southeast Asia as key potential risks. In addition, digitalization of the financial services industry and strong investor focus on environmental, social and governance risks could have "profound effects" on Asia-Pacific banks, the rating agency said in a note on Oct. 20.

"The past quarter was tough for banks in some jurisdictions," said Ratings credit analyst Gavin Gunning. "Notably, the spillover effects from property sector risks in China are heightened as the malaise engulfing [China Evergrande Group] plays out."

China is yet to see the end of Evergrande's debt troubles. While Ratings analysts are optimistic that the country's banking sector would be able to withstand a default by the property giant with no significant disruption, worries about knock-on effects remain.

In the quarter ended Sept. 30, concerns about the property sector affected the performance of Chinese banks. Over the three-month period, the market capitalization of most of the largest lenders in China dropped amid a less-optimistic outlook for the country's economic recovery.

In Southeast Asia, the risk of fresh COVID-19 outbreaks, the slow pace of vaccination and the debt burden on individuals and small businesses are drags on emerging markets such as Thailand, the Philippines, Malaysia, Vietnam and Indonesia, according to Ratings.

Gunning said recent government intervention in some countries in Southeast Asia has added to negative sentiment. Malaysia, for instance, announced a plan to waive three months of interest for low-income borrowers hit by the pandemic. Ratings said the plan would potentially shave as much as 20% of banks' profits in 2021 and drive up credit costs.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.