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Bad debt grows in top Southeast Asian countries as economies slump with China

Banking Essentials Newsletter December Edition Part 2

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Bad debt grows in top Southeast Asian countries as economies slump with China

Baddebt is becoming agrowing pain for banksin major Southeast Asian nations,mirroring a trend in China, as their economies weaken together.

InIndonesia, the largest ASEAN country by nominal GDP, the mean nonperforming loanratio of the top three lenders rose for two straight years to 1.84% at the endof 2015, while the figure in the bloc's No. 2, Thailand, jumped to 3.32% from2.62% in the 12 months through Dec. 31, 2015, according to SNL Financial databased on company disclosures. The average in Malaysia, the next-biggestSoutheast Asian economy, crept up to 1.80% from 1.74% over the year.

Themean ratio of loan loss provisions to average customer loans also rose in eachof the three nations in 2015.

TheIndonesian economy expanded at the weakest pace in six years in 2015, whilegrowth in Malaysia slowed by the most since 2010. Thailand recovered from theaftermath of political unrest in 2014, but its 2015 growth rate was still lessthan half where it was as recently as 2012.

Onecommon challenge for the countries is a slumping China, the largest tradingpartner for ASEAN as a whole. The world's second-largest economy ended 2015with the lowest growth rate in 25 years, sending ripples across countriesaround the world. Particularly, China's waning demand for everything fromrubber to fuels is exacerbating a commodities slump that has hurt exportrevenue for resource-rich Indonesia and Malaysia.

Troublesfor banks in China-dependent economies are becoming clearer as they report moreproblem assets.

"Reduceddemand in China ripples out, especially in commodities," said Ivan Tan, a Singapore-basedbank analyst at Standard & Poor's RatingServices. "The link to bad debtsfrom a slowdown in China is a clear and present danger."

S&PRatings and SNL, an offering of S&P Global Market Intelligence, are ownedby McGraw Hill Inc.

Souredloans are growing in China as well. The average NPL ratio of the country'sthree biggest banks shot up to 1.83% at the end of 2015 from 1.29% a yearearlier, as each of them reported the metric at the highest level at least since2008, according to SNL data going back that far. Similarly, their averageprovision ratio climbed in 2015.

The2016 outlook for China is not so rosy. The country's government set its growthtarget for the year at a range of 6.5% to 7%, suggesting they are bracing for afurther slowdown from 2015, when GDP increased 6.9% in real terms.

Thereal GDP expansion rates of Malaysia and Thailand are also projected to fall,although Indonesia may regain some strength, according to EconomistIntelligence Unit estimates.

Thedownturn in China has "pinched" export-oriented economies in Asia,but banks will likely continue to write more loans in most parts of the region,said MatthewCircosta, aSydney-based economist at Moody's. Credit costs may keep growing in tandem,however, as they set aside more provisions and as delinquencies increase.

"Someof this lending is likely to turn sour," Circostasaid.

But itis not all doom and gloom for banks in Southeast Asian countries; their risingeconomies still offer plenty of growth potential. Bank stocks in that part ofAsia a positive totalreturn in the first quarter, while those in China, Japan, South Asia, Australiaand New Zealand all cost investors money during the period, according to marketcapitalization-weighted indexes for SNL-covered companies.

"These are economies stillgrowing and at quite a fast pace," Tan said.

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Click here to access the SNL worldwide bank ranking template and view key balance sheet figures, performance and asset quality ratios for individual banks.