Top Asia-Pacific bank executives remained cautious about rising interest rates, as well as the potential fallout of Russia's invasion of Ukraine, even though they acknowledged the developments could create challenges for some customers.
The impacts of the developments — tightening monetary policies, rising inflation and the conflict in Ukraine — are still manageable, top bankers said during earnings calls for the quarter ended March 31, as they weighed in on how their businesses and customers will be affected.
"As the economy moves into the rising rate cycle, it's important to remember that rates are moving from a very low base," said Westpac Banking Corp. CEO Peter King.
New experience
While the first half of 2022 has been challenging for customers and spending may be tempered by higher prices and higher interest rates, the Australian economy is robust, King said. "The positives of strong household and business balance sheets, combined with the continued reopening of international borders and local economies, will likely increase economic activity," the CEO noted.
The Reserve Bank of Australia on May 3 raised its cash rates by 25 basis points to 0.35%, increasing the policy rate for the first time in 11 years. The Reserve Bank of Australia is one of many central banks, including the U.S. Federal Reserve, which have started raising rates to control rising inflation after monetary policy easing in the past two years. In addition, the fallout from Russia's war in Ukraine has put additional pressure on prices, especially of energy and commodities.
National Australia Bank Ltd. CEO Ross McEwan said the rate hike will be a new experience for some customers and would affect household budgets, but most customers are in good shape. Australia and New Zealand Banking Group Ltd., or ANZ, CEO Shayne Elliott also shared the same view and said ANZ is well placed to continue supporting customers as "they manage in a world of higher inflation and interest rates."
Opportunities for banks
Bank executives said the rate hikes, while challenging for customers, will have a positive impact on their interest income and margins.
United Overseas Bank Ltd. CFO Wai Fai Lee said he expects rising rates to convert into higher margins and interest income for the bank. "So we have earlier guided that we have estimated that for every 25 basis point rate increase, our net interest income will improve by S$150 million on an annualized basis," the executive said during the bank's earnings conference call.
DBS Group Holdings Ltd. CEO Piyush Gupta also expects some unexpected tailwind for the bank from the policy rate increases. "So even if we decide to hang on to the general provision buffer for longer, whatever we sort of lose by not releasing it, I think we will more than make up for that through interest rates in the course of this year," the executive said.
War hit
Asia-Pacific bank executives remain cautious about the impact of the Russia-Ukraine crisis despite their banks' small direct exposures. S&P Global Ratings said in March that Asia-Pacific banks' direct exposure to Russia was low and appeared manageable but that they could only take a hit to their asset quality from secondary effects of the ongoing conflict.
"As a Southeast Asian bank focusing on intra-regional flows, we are less directly impacted by the Russian-Ukraine conflict," said United Overseas Bank's Lee said. Oversea-Chinese Banking Corp. Ltd.'s CEO, Helen Wong, also noted that the Singaporean bank's exposures to Russia and Ukraine are minimal.
Bank of China Ltd. said it will be assessing the situation in Ukraine as well as other risks, including the appreciation of the U.S. dollar, which has enabled some commodity prices to rise.
"We will monitor the implications of these risks to our client cash flow situation and to the client's resiliency, so we can further dispose of the possible risks," Chief Risk Officer Jiandong Liu said March 29, after the bank released its full-year 2021 results. Later in April, the Chinese bank posted a 5.6% year-over-year increase in its first-quarter net profit.
Over in Japan, Mizuho Financial Group Inc. also expects downward pressure on global economic growth due to rising resource prices in response to the situation in Russia and Ukraine, accelerating inflation in the U.S. as well as rising market interest rates.
"As a main scenario, the plan is based on the assumption that Japan's COVID-19 infections will peak out and real GDP will recover moderately through the second half of fiscal year 2022," CFO Makoto Umemiya said.
Looking ahead, India's Axis Bank Ltd. will "continue to closely monitor two key variables: geopolitical risk and its first and second order impact on inflation, liquidity and growth and any potential future COVID waves and resultant government policy action thereon," President and CFO Puneet Sharma said April 28 during the bank's earnings conference call.
