articles Ratings /ratings/en/research/articles/200406-for-asia-pacific-banks-covid-19-crisis-could-add-us-300-billion-to-credit-costs-11359063 content esgSubNav
In This List

For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs


Instant Insights: Key Takeaways From Our Research


Banks Switch Gears To Tax-Exempt TOBs As Taxable Rates Hit New Highs


Tech Disruption In Retail Banking: Irish Banks Are Working With, Not Against, Fintechs


Tech Disruption In Retail Banking: Financial Inclusion In Mexico Will Remain Low Despite Digitalization

For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs


The economic storm created by COVID-19 will test the ratings resilience of the region's 20 banking sectors. S&P Global Ratings recently cut our GDP assumptions for the region. We estimate an additional US$300 billion spike in lenders' credit costs and a US$600 billion increase in nonperforming assets (NPAs) in 2020. We therefore believe negative rating momentum is likely for some Asia-Pacific banks during 2020 (see chart 1).

Chart 1


Policy Responses Will Not Stop Spike In NPAs and Credit Losses

The resilience of banks' asset quality in 2020 hinges on the success of governments' and regulators' policy responses. These measures are in early stages. Some have started, some are in planning, and we suspect many more may be in the wings.

Asia-Pacific governments, central banks, and supervisory authorities have rolled out diverse measures to address COVID-19. These include liquidity injections, targeted loans to affected industries and regions, and policy rate cuts. It also includes support for banks to provide forbearance to otherwise economically viable households and businesses sideswiped by COVID-19. The equation underpinning policy responses is simple in theory but difficult in practice, and always comes at a significant fiscal cost.

We believe the policy responses will reduce the chance of a significant deterioration in the creditworthiness of the banking sector. However, prospects over the next six to 12 months are less certain. Many measures are designed to plug a gap over a short period—generally, months--to assist households, the temporarily unemployed, and businesses at risk of failure. Despite such measures, we cannot identify a single banking system in which NPAs and credit costs will not increase this year. In some cases the increase will be significant.

For a detailed discussion of policy responses see discussion in the country sections of this commentary, and see commentaries in the related research list.

Chart 2


Chart 3


Forbearance--A Balancing Act

A key question is whether under International Financial Reporting Standard (IFRS) 9 banks will reclassify stage one loans (performing) as stage two loans (underperforming), when borrowers are under a repayment moratorium or other form of forbearance. Such a reclassification will have significant implications for loan-loss provisioning as stage-two loans require banks to book lifetime expected loss provisions compared with only 12-month expected loss provisions for stage-one loans. That said, credit guarantees or other forms of forbearance by governments may reduce the quantum of lifetime loss provisions for stage-two loans.

Bank management decides whether loans are classified as stage one or stage two. In the short term, we believe such reclassifications are less likely. Authorities estimate the pandemic will peak about midyear (that is, the effects will be temporary) and will be followed by an economic recovery.

Furthermore, during any payment moratorium, interest continues to accrue on loans. Managers may be inclined to hold off acting on underperforming loans they expect will be fully performing in short order. Of course, the longer it takes for a loan to emerge from moratorium to fully performing status, the more difficult it will be to rationalize not reclassifying the loan as a stage-two asset.

We will monitor banks' reported information, including management information alongside financial accounts on reporting dates, to understand how banks are treating loan classification.

We see potential for loans classified as performing to be reclassified as underperforming by end-2020. Still, if we assessed that banks' forbearance measures were delaying recognition of credit losses, we may consider such loans to be effectively nonperforming in our bank analysis and review our risk and capital assessments. Our expectation of ultimately higher credit losses reinforces our view about the potential for negative ratings momentum for some Asia-Pacific banks as 2020 unfolds.

Downside Risks Are Significant

The principal risk we see beyond our base case is that the coronavirus will spread faster, further, and for longer. This will deepen the economic pain we already anticipate for 2020. Financing conditions may likewise sour as investors become more risk averse. This would hit bank credit.

While banks are not as exposed as the corporate sector during the initial stage of the pandemic, the strain on lenders could ultimately be profound. Banks face a second-order hit compared with the corporate and household sectors, which are feeling the immediate pain. It's the snowballing effects on people movement (tourism, business travel, and education), supply chains, trade, and commodity prices that will eventually hit bank asset quality, and may disrupt bank credit ratings.

Effect on 2020 NPAs And Credit Losses Will Be Substantial

Based on recent economic forecasts (see "Credit Conditions Asia-Pacific: As Bad As 1997," March 30, 2020) we expect 2020 to be difficult for Asia-Pacific banks. As risks associated with COVID-19, the oil price shock and significant market volatility take hold, we estimate that Asia-Pacific in 2020 will be hit with US$600 billion in additional nonperforming assets, and additional credit costs of about US$300 billion.

Chart 4


In absolute dollar terms, we expect China to account for the lion's share of these new NPAs (about US$471 billion) and credit costs (about US$224 billion) (see chart 4).

This is not surprising given the Chinese banking system dwarfs all other banking systems in Asia-Pacific. China's banking system is bigger than the accumulated size of all other major banking systems in Asia-Pacific combined.

The next largest banking system in Asia-Pacific is the Japanese banking system, which is about one third the size of China's. This is notwithstanding the fact that Japan is the world's third largest economy (after China, which is the second largest).

COVID-19 hit China first and has hit hard. The shock to the economy will cause a sharp spike in NPAs and credit losses in 2020. Our recently revised 2020 GDP growth assumption of 2.9% would be China's lowest growth since 1976. While the downside risks in China, and elsewhere across the region, remain significant, infections in China have dropped, and there are early signs the economy is normalizing.

An analysis of NPAs and credit costs across the region from a ratio perspective gives a more nuanced view of our outlook for asset quality (see charts 2 and 3). We expect the Chinese banking sector to be hit hard, as indicated by the NPA ratio, which we expect to increase by about 2.0% in 2020, and credit losses, which we expect to increase by about 100 basis points. The NPA ratio in India is likely to fare similarly to China's (1.9% vs 2.0%) but the credit costs ratios should be worse, increasing by about 130 basis points.

NPA and credit losses ratios in Indonesia also stand out in an Asia-Pacific context. (For a more detailed discussion on individual countries see the country comments section).

Pain For Financial Institutions' Creditworthiness Will Vary

The hit to economic and financing conditions in Asia-Pacific after COVID-19 will vary by region. Prior to the crisis, we had a stable outlook on 19 of 20 Asia-Pacific banking systems. Trends were negative in Sri Lanka; and no jurisdictions showed positive trends. Many Asia-Pacific systems are likely to show some resilience at current rating levels, not being particularly vulnerable leading into the downturn. Considering the dramatic impact that COVID-19 and other stresses are having on specific countries and banks, more negative views will be inevitable.

Jurisdictions and sectors with less buffer at current rating levels may include those where:

  • We saw weakness prior to the outbreak. This includes India, which already had a large overhang of problem loans before COVID-19 took hold. That's in contrast to other major Asia-Pacific banking systems.
  • There are signs that market stresses will hurt banks. This includes Indonesia where the corporate sector has a greater reliance on U.S.-dollar borrowings, and which has high exposure to commodity prices. Our Credit Conditions Committee recently highlighted the risks regarding U.S. dollar funding and commodity price volatility (see "Credit Conditions Asia-Pacific: As Bad As 1997," published March 30, 2020).
  • Companies and nonbank financial institutions (NBFIs) are inherently more vulnerable than banks. The NBFI sector in Asia-Pacific (and other regions) is comprised of a large number of financially weaker players compared with the banking sector. Initial negative ratings momentum in the financial institutions sector globally has featured rating actions on NBFIs.

As a point of contrast, we would highlight some jurisdictions that have experienced negative rating momentum in recent times. This includes China, where in 2017 we revised negatively our banking industry country risk assessment. Notwithstanding recent adverse economic developments, the Chinese banking sector likely has some scope for slippage in financial metrics, with no immediate need to adjust ratings.

Finally, if a U-shaped recovery takes hold this year--our base-case--this will stabilize Asia-Pacific banks in 2021. A rebound in 2021 may negate rating downgrades for systems with sufficient buffers to see banks through to the recovery period. Further, some losses booked in 2020 may be reversed should a recovery take hold. If and until the recovery occurs, however, the risk to ratings remains unambiguously skewed to the downside.

Corporate Knock-On Effects To Banks May Be Significant

Bank credit quality in Asia-Pacific remains vulnerable to a deterioration in corporate credit quality. We believe that 10 of 19 corporate sectors in Asia-Pacific are of high risk to the outbreak of COVID-19, and nine of 19 corporate sectors are medium risk (see chart 5). We consider no corporate sectors to be low risk.

In Asia-Pacific, the COVID-19 fallout to date has been more intense in auto, building, materials, consumer discretionary, gaming, metals and mining, retail, transportation cyclical, and infrastructure sectors. As at March 26, 2020, we had taken 45 ratings actions related to COVID-19 in the Asia-Pacific corporate sector. While we expect lower interest rates, government stimulus, and other policy actions will provide relief, we ultimately believe that the slump in demand will lead to declining credit quality and rising defaults.

Chart 5


Sovereign Credit Trends--A Key Factor For Asia-Pacific Banks

We believe governments in 14 of 20 Asia-Pacific countries are supportive of systemically important private sector banks in their jurisdictions (see chart 5). Because our assessment of sovereign support provides ratings uplift to most of these banks, they likewise will be vulnerable to negative changes in outlooks or ratings on the sovereign.

This feature of the ratings construct for many systemically important banks in Asia-Pacific is a point of contrast with Western Europe and the U.S. In these jurisdictions there is the potential for ratings uplift for systemically important banks mainly because of additional loss-absorbing capacity, but not because of government support.

Chart 6


COVID-19 Stresses Could Undermine Other Rating Factors

So far, we believe that stresses associated with COVID-19 in Asia-Pacific may most likely affect:

  • Our Banking Industry Country Risk Assessments (BICRA), which could then in turn change our view of all banks within a particular banking jurisdiction;
  • Our bank-specific assessment of risk positions and asset quality (which is why we are focused on NPAs and credit losses in this commentary); and
  • Government support if sovereigns are downgraded (as relevant for systemically important banks in some Asia-Pacific jurisdictions).

We would note, however, that the fallout from COVID-19 is in the early stages and ratings could be affected for other reasons. For banks that encounter significant issues with their business models, we may need to adjust our business position assessments. For banks that encounter material funding difficulties or operational risks, ratings could likewise be affected. We have already taken some rating actions in the U.S. on NBFIs because of funding risks.

Chart 7


It is challenging to predict the levels of banks' NPAs and credit losses in 2020. The course of COVID-19 is uncertain. S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. We note that some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. Already, we believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

Asia-Pacific Banks In Reasonable Shape As COVID-19 Hits

As well as seeing stable economic and industry conditions leading into COVID-19, our asset quality outlook for most large, strong Asia-Pacific banks prior to the outbreak was generally stable, and compared favorably with other regions (see chart 7). Furthermore, the capital buildup for many Asia-Pacific banks has been strong over recent years, even if it is now tapering. The capitalization of most banks is sufficient to withstand moderate increases in credit costs with no change in ratings. Such balance-sheet strength will in part buttress Asia-Pacific banks from COVID-19 stresses.


Sharad Jain, Melbourne, (61) 3-9631-2077;

Nico N DeLange, Sydney, (61) 2-9255-9887;

Lisa Barrett, Melbourne, (61) 3-9631-2081;

A contracting economy in the short term, rising unemployment, and depressed consumer and business sentiment in the wake of the COVID-19 outbreak should increase credit losses for Australian banks. We consider that restrictions on travel, movement, and other government measures will severely reduce the economic activity in the country until a recovery begins by the end of this year.

The outbreak follows several major natural disasters in Australia, such as bushfires and storms. The events will amplify the impact of the pandemic, with second-order effects on the economy and banking system, such as those relating to job losses and underemployment. Nevertheless, we expect the fiscal and monetary support announced by the Australian authorities in the past two weeks, in combination with hardship relief measures announced by the banks, will cushion the blow of COVID-19 to households and businesses, and consequently the banking sector.

We expect Australian banks' credit losses in 2020 to more than triple the historically low level set in 2019. We anticipate that the business loans will contribute to most of the increase in credit losses for the Australian banks, and the tourism, transportation and retail services will likely be among the more severely affected sectors. We expect defaults from households to rise due to income loss.

Despite such a significant increase, the Australian banks' credit losses should remain broadly in line with our expected long-term average. This partly reflects our expectation that the Australian economy will strongly rebound toward the end of the current calendar year following a significant downturn.

We anticipate sufficient headroom will remain in Australian bank earnings to absorb the credit losses without posing a significant risk to their creditworthiness. That is notwithstanding earning headwinds from low and declining interest rates and the customer remediation costs in relation to governance lapses in recent years. At the same time, we believe a longer lasting and more severe COVID-19 crisis than our revised base case may result in significant problems for the Australian banking system.


Harry Hu, CFA, Hong Kong, (852) 2533-3571;

Ming Tan, CFA, Hong Kong, + 852 2532 8074;

In our revised baseline scenario, with China's 2020 GDP growth at 2.9%, the economic shock corresponds to a steep rise in forborne loans. We estimate that around half of this is broadly in line with our NPA definition. Accordingly, we estimate the NPA asset ratio for China's bank sector to rise to 7.25% (including the policy banks).

We expect regulators to allow flexibility in how banks recognize nonperforming loans (NPLs) for virus-affected businesses and communities. Reported NPL ratios may rise to only around 2.2%, with the remaining impacted loans likely to be classified as special mention loans or earmarked but kept in the normal loan classification. This reflects regulators' greater tolerance for a moderate increase in NPLs, so long as there are no cracks in the financial system.

Assuming provisions of 150% on reported new NPLs and 5% on additional special mention loans, coverage for the system should broadly remain at around 200% (including policy banks). But this cover falls to 62% of system nonperforming assets, which is not unreasonable based on banks' loss experience.

The credit costs from these forborne loans going bad over the coming years is manageable under our current economic recovery assumptions where we expect GDP growth to rebound to 8.4% in 2021. For 2020, the impact on the system's capital adequacy would be about 66 basis points before taking into account the loan-loss provision buffer that the sector built in previous year.

The hit to individual banks would be largely determined by the bank's credit exposure to highly affected sectors and regions, as well as the size of its loan-loss provision buffer.

We expect the impact on the largest Chinese banks to be manageable, while smaller banks with aggressive risk appetite or high geographic concentration in heavily hit regions could see a material squeeze on their asset quality, performance, and capitalization.

Hong Kong

Fern Wang, CFA, Hong Kong, (852) 2533-3536;

Shinoy Varghese, Hong Kong, (852) 2533-3573;

The COVID-19 outbreak has added to Hong Kong banks' stack of issues: protests, U.S.-China trade tension, and China's economic slowdown. Moreover, as an open, export-oriented economy, Hong Kong is highly exposed to the global economic slowdown. We forecast Hong Kong to be in recession in 2020, with its GDP contracting 1.7%. Travel and tourism, hospitality, entertainment, trade, and retail sectors will likely be the hardest hit, dragging on credit demand and quality. Some of these sectors are already under severe strain because of social unrest in Hong Kong.

As of end-December 2019, loans related to travel and tourism, hospitality, and entertainment accounted for about 5% of system-wide loans, wholesale and retail trade comprised about 4%, credit cards and other personal loans about 8%, and property-related loans including mortgages about 30%. A sharp increase in the unemployment rate will also have a negative impact on banks' credit card receivables and, to a lesser extent, residential mortgages.

We forecast the average ratio of NPLs (includes substandard, doubtful and loss classifications) to customer loans could increase by about 40 basis points to 0.95% from a multi-year low of 0.55% at end-2018 and 0.57% at end-2019. At the same time, we estimate credit costs could increase by about a manageable 35 basis points to 0.6%. This partially reflects changes in the forward-looking economic variables, which will drive up provision costs under IFRS 9 (rules governing financial instruments).

Conservative underwriting and supportive government policies--including stimulus targeting small and midsize enterprises and the retail sector--should cushion the economy and the banking sector. We believe that, despite current uncertainties, the fundamentals of Hong Kong banks remain solid, underpinned by solid customer deposits with limited reliance on short-term wholesale funding. The banks have solid capital bases with an average Tier-1 ratio of 18.5%, as of end-December 2019.


Geeta Chugh, Mumbai, (91) 22-3342-1910;

Deepali V Seth Chhabria, Mumbai, (91) 22-3342-4186;

Amit Pandey, Singapore, (65) 6239-6344;

We estimate India's GDP to grow a mere 3.5% in fiscal 2020-2021 (ending March 31, 2021), compared with our earlier estimate of 6.5% leading into 2020. Even this diminished number assumes a normal monsoon, and that the pandemic subsides in the April-June quarter.

The slump in growth will be concentrated in the first half of the current fiscal year, while the second half should see a mild recovery. For now, we see COVID-19 hitting the demand and supply sides of the economy via domestic and external channels. A government-mandated lockdown on movement has brought the country's manufacturing and service sectors to a grinding halt, and disrupted supply chains. Service exports, which now account for 41% of total exports, have been resilient. A recession in advanced economies would dampen prospects for information technology enabled services, tourism, diminishing growth for such exports.

In our previous review we assumed credit costs in the Indian banking sector would improve to 1.5% in fiscal 2021. We now expect the credit costs to increase to 2.8% in fiscal 2021, before declining in fiscal 2022. An economic slowdown in fiscal 2021 and a protracted recovery would lead the sector's asset quality to deteriorate.

Banks are already facing a high risk of rising NPLs in sectors such as commercial real estate and construction (3.7% of total loans as of January 2020) and telecom (1.5% of total loans), both of which have been under stress in the past few years. We also expect a few slippages from nonbanking finance institutions, which account for about 8.3% of total Indian banking sector loans. Slippages may also come from sectors directly affected by the COVID-19 outbreak and subsequent lockdown.

We believe there will be a high impact on sectors such as aviation, tourism and hospitality (transport operators and tourism, hotels and restaurants form 2.1% of loans) and retail trade (3.2% of loans). If the slowdown is accompanied by mass unemployment, it may also hurt the personal loan book of the banks, which now form around 7% of the total loan book.

We believe that the steps taken by the government and the central bank should provide some respite such as allowing banks to delay recognition of bad loans. The central bank recently cut the policy rate by 75 basis points to 4.4%. The lower interest rates boost borrowers' capacity for repayment. The central bank in March also allowed commercial banks and nonbank financial companies to offer to their borrowers a three-month moratorium on payment of instalments on their loans.

We expect these measures to limit the immediate impact on reported credit costs. The banks have improved their capital levels last year, with Tier 1 ratio of the system at 12.2% as of March 31, 2019. Their capital ratios should remain at a similar level in the current fiscal year.


Ivan Tan, Singapore, (65) 6239-6335;

The COVID-19 outbreak is hitting tourism, transport, trade, manufacturing, and investment in Indonesia. It is also hurting the country's economy as people minimize going out--private consumption accounts for almost 60% of its GDP. S&P Global Ratings estimates Indonesia's economic growth will decelerate to 3.8% in 2020, compared with 5% in 2019. The recent sharp rupiah depreciation has compounded risks. The currency decline could gather pace with foreign investors fleeing to the safety of the U.S. dollar. That would pose a major refinancing risk for Indonesian companies that rely heavily on foreign currency funding. Although foreign exchange regulations allow companies to increase the share of hedged foreign currency loans, the levels of unhedged foreign-currency debts in corporates are sizable.

Indonesia, being a major commodity producer and exporter, is also susceptible to volatility in commodity prices, which affects banks. Commodity prices, including crude palm oil and coal, have dropped as the COVID-19 outbreak depresses demand.

The mining sector comprised just 2.4% of Indonesian bank loans as of December 2019. However, the country's miners support entire industries and ecosystems, to which the banks are also exposed, and which are also suffering.

Our nonperforming assets and credit cost assumptions translate into material risks for Indonesian banks. We forecast a 1.5 percentage point increase in weak loans (nonperforming loans plus special mention loans) to 9.3%, and for credit cost to rise to 285 basis points in 2020 (versus our prior assumption of 185 basis points. However, Indonesian banks' capital and provisioning buffers have grown over the years and now offer a sizable capital cushion. The banks' Tier-1 capital ratio of 21.9% and capital adequacy ratio of 23.4%, as of December 2019, are among the highest in the region, with high-quality common equity Tier-1 forming the bulk of capital.


Ryoji Yoshizawa, Tokyo, (81) 3-4550-8453;

Chizuru Tateno, Tokyo, (81) 3-4550-8578;

We expect the direct effect of the outbreak on the ratings on Japanese financial institutions to be modest, although we note material downside risks. S&P Global Ratings assumes Japanese GDP will shrink 1.3% in 2020. That is a big drop but still keeps domestic banks within ranges that support our ratings. Japan's nonperforming loan ratio and loan loss provisions are low. Banks' exposure to the retail, restaurants, and accommodation sectors are below 5% of their total exposure. The government has pledged forbearance measures for small to midsize enterprises hit by the economic plunge, and large corporations hurt by supply chain disruptions.

The central bank's liquidity support has helped lenders weather tightening funding conditions, especially in foreign currencies. Japanese banks tend to have sizable equity holdings and they have been hurt by a stocks selloff. However, the impact has been partly offset by a rally in U.S. Treasury bonds, which are also widely held by Japan banks. As such, we expect the financial institutions we rate will likely absorb the effects of the outbreak, in our view.

Our estimates of the Japanese banks' credit costs and nonperforming assets look at the relationship of these variables with GDP growth. Our analysis incorporates lessons of the 2008-2009 global financial crisis, and the Tohoku earthquake in 2011. Our assumption for a 1.3% drop to minus 1.2% in Japan's real GDP in 2020 is greater than the drop in GDP seen after the earthquake, but lower than that after the financial crisis. Our estimates on nonperforming assets and losses references this data.

Finally, but importantly, a downward revision of Japan's sovereign outlook could negatively affect some bank's outlooks and ratings. We incorporate possible government support on the outlooks and ratings of some banks. For example, the positive outlooks of some large financial institutions reflect the positive outlook of the Japan sovereign. The sovereign's positive outlook bolster the ratings of some regional banks. Therefore, if we negatively revise the sovereign's outlook or rating, we may negatively revise the ratings on some financial institutions.


Daehyun Kim, CFA, Hong Kong, (852) 2533-3508 ;

An economic pressure hit by the COVID-19 will weigh on Korean banks' asset quality and profitability in 2020. This will exert headwinds on the wholesale, retail, accommodation, and food service industries, collectively accounting for about 10% of the banks' exposure as of December 2019. We assume a global recession is underway, which will hurt Korea's export-oriented firms, and the small to midsize enterprises that populate the supply chain. We expect industries such as shipbuilding, shipping, autos and steel could be pressured amid weakened global demand.

These dynamics may erode household income, straining the loan quality of highly indebted Korean households. Korean banks' credit costs will likely more than double to around 55 basis points, from a historically low level seen in recent years.

Nevertheless, we believe the Korean banks will maintain adequate capital buffers and prudent risk management to navigate the headwinds. The banks' moderate growth will likely support the banks' current capitalization despite profit weakening. The banks have tightened underwriting standards, built in additional provisioning and reduced exposure to risky corporate sectors such as shipbuilding, shipping and real estate project finance loans over the past several years. The banks' low loan-to-value ratios of around 50%-55% for mortgage loans, and tightened oversight onf borrowers' repayment capability, could mitigate some pressure on household loan quality, in our view.

Additionally, we believe the Korea government's expansionary fiscal policies will support domestic consumption and employment as well as financial market stabilization measures (worth about Korean won 100 trillion or about US$81 billion), which include funding and liquidity support to businesses and financial markets, could limit any severe economic fallout. The central bank will also likely maintain its easing monetary policy stance.


Rujun Duan, Singapore, + 65 6216 1152;

The Malaysian government's measures to fight the outbreak in the country have restricted the movement of people and goods. Our economists now assume Malaysia's GDP will grow 2.4% in 2020, almost half our 4.5% growth forecast that we set in December 2019. Accordingly, we believe bank sector loan growth may slow to an anemic 1%-2% in 2020, year-on-year, before rebounding back to around 5% in 2021.

The virus outbreak and hydrocarbon price collapse have hit the oil and gas, transport, hotel and restaurant sectors. The same sectors will likely benefit from relief measures extended by the government and banks. However, in our base case, some players in those sectors will not survive this crisis, which will leave a scar on Malaysian banks' balance sheets.

We expect Malaysian banks' nonperforming asset ratio will reach 2.2% in 2020, up from our previously forecasted 1.7%, as the economic fallout accelerates. Banks' annualized credit cost may increase to 60 basis points in late 2020 or early 2021 assuming the regulatory forbearance and government rescue packages could enable banks to spread out the incremental credit losses over the next 24 months.

In our base case, we still believe employment conditions will remain stable. Government stimulus measures largely shield low-income and self-employed groups. A transitory flare-up in the unemployment rate and household credit defaults are possible, according to our base case. A longer-term deterioration in the employment rate could have severe consequences for domestic banks' financial health, given close to 60% of banks' balance sheets are exposed to households. The important mitigators we see for Malaysian banks include their strong capital buffers and good asset quality that prevailed prior to the COVID-19 outbreak.


Nikita Anand, Singapore, + 65 6216 1050;

Philippine banks will see slower loan growth and rising nonperforming loans (NPL) as the COVID-19 outbreak hits the economy and markets. We revised our 2020 GDP forecast for Philippines to 4.2% from 6.2% reflecting global spread of the pandemic and the government's one-month lockdown of Luzon island, which accounts for 70% of the economy. We expect trade, tourism, private-sector investment and consumption in the Philippines to be affected. This will drag on banks' lending. Region-wide disruptions to the electronics sector and factory closures in China affecting supply chains will also slow growth in Philippine manufacturing (10% of banking sector's loans).

The banking sector's exposure to hotels and catering is about 2%, wholesale and retail trade is 12% and transport is about 3%. These sectors could see rising nonperforming loans in coming quarters. We are forecasting NPLs and credit costs to increase about 50 basis points to 2.7% and 1%, respectively, in 2020. We note that moratoriums and regulatory forbearances should stabilize borrowers' creditworthiness and prevent some defaults. Most large banks have offered moratoriums on repayments to eligible retail and small to midsize enterprise borrowers. Large conglomerates that own shopping malls across the country have waived rental fees for the duration of the lockdown, providing breathing room to small businesses.

The central bank has allowed banks to exclude loans to affected borrowers from their calculation of reported past-due loan ratio for a period of one year, and staggered the booking of provision for credit losses over a period of five years. We believe these measures will alleviate pressure on the banks but also delay the true recognition of bad loans. Nonetheless, in our view, Philippine banks have good capital buffers, with an average Tier-1 capital adequacy ratio of about 14%, and this will help them manage the rising risks.

Philippine government's Philippine peso 27.1 billion stimulus to support affected sectors and dislocated workers will cushion the impact. The central bank has cut policy rates by 75 basis points so far in 2020, and further easing is likely. This will support borrower's credit quality. However, the pressure on net interest margins will weigh on banks' profitability, as will higher credit costs.


Ivan Tan, Singapore, (65) 6239-6335;

Banks in Singapore will experience higher delinquencies, credit costs and weaker earnings as the COVID-19 outbreak plunges the economy into recession. As a trade-dependent economy and a major aviation hub, Singapore is likely to be hit hard by the COVID-19 outbreak. We are forecasting a recession in 2020 with a 2.6% contraction in GDP.

The virus outbreak has hurt tourist numbers, dragging on the hospitality, tourism, and airline sectors in Singapore. The transport and general commercial sectors respectively account for about 4% and 10% of Singapore's domestic loans; which is meaningful. The second-order effect on demand consumption and employment will also be material, affecting businesses and the banking sector.

We forecast that credit cost will more than triple the historical norm due to widespread business disruptions, mirroring past recessions such as the Asia financial crisis. This credit cost is, however, increasing from a low base and we believe this could be largely covered by profits, leaving the bank's capital position intact.

The rated Singapore banks are facing these headwinds from a position of strength, having enjoyed several years of robust profitability. They have consistently strengthened their balance sheets and maintained healthy Tier-1 capital adequacy ratios of about 15%. Government stimulus will also buffer some of the downside risks, including an unprecedented stimulus plan worth about Singapore dollar (S$) 48.4 billion to deal with the economic fallout of the pandemic, with the government tapping its vast reserves for only the second time in history. That is in addition to S$6.4 billion of measures announced in February 2020 to sustain businesses and households through the outbreak.


Eunice Fan, Taipei, (8862) 8722-5818;

The COVID-19 outbreak will likely pressure Taiwan banks' asset quality and profitability for the coming quarters. Taiwan's export-oriented economy is susceptible to the slowdown in China and other key global markets. We have lowered China's 2020 GDP growth assumption to 2.9% and that of Taiwan to 0.8%. This is a sharp drop from China's 6.1% growth in 2019, and Taiwan's 2.7% growth in the same year.

The slowdown in China economy will restrict Taiwan's economic growth, as China (including Hong Kong) accounts for almost one-third of Taiwan's external trade and is its largest trading partner. Nonetheless, we expect this global health crisis will have a limited impact on the sector's overall credit strength under our base case analysis. We believe the banking sector is sufficiently capitalized to absorb a rise in credit costs and weakening profitability. Abundant liquidity provides an additional buffer.

In our base case, we expect Taiwan banks' impaired assets (official nonperforming loans plus substandard loans) ratio to increase substantially by 40-50 basis points over the sector's total loans in 2020. Credit costs may almost double from 2019 levels. Small and midsize enterprises are particularly sensitive to the global demand slump and supply chain disruptions, in our view.

We believe the government measures--fiscal stimulus, monetary easing, soft loans, credit guarantees, tax reduction and compensation to virus-hit businesses—will support borrowers' debt servicing capacity. Banks' asset quality metrics should not hit the trough seen in 2009 after the global financial crisis. Meanwhile, we estimate bank lending to the highly impacted sectors such as transport, and the lodging and dining industries in Taiwan accounted for less than 5% of banks' total loan book. Overall, we expect banks to absorb these credit costs with their earnings and solid capitalization.


Deepali V Seth Chhabria, Mumbai, (91) 22-3342-4186;

For Thailand, we believe the COVID-19 outbreak will exacerbate an economic slowdown already underway due to weak external demand, pushing the economy into recession. We assume GDP will shrink by 2.5% in 2020.

Thailand's tourism industry is large--travel exports account for 11% of GDP. Tourism and hospitality will bear the brunt of the outbreak's impact due to severe travel restrictions globally. We assume tourist arrivals to Thailand will fall significantly in the first half of 2020, before recovering in the latter part of the year.

As of Sept. 30, 2019, restaurants, hotels, and transport accounted for 4.4% of the loan book in the Thai banking sector, with exposure to small to midsized enterprises (SMEs) about half of this. Trade, which forms about 12.4% of the loan book, may also be strained, SMEs account for 74% of this exposure, and will be more vulnerable in a weak economic environment. The contribution of exports to Thai GDP is also very high at more than 60%. The outbreak may deliver a significant hit to the country's exports.

The Thai economy is also highly exposed to supply-chain disruptions. Electronics, metals, and chemical product producers are particularly exposed to such outages.

We believe that the steps taken by the government and central bank may lessen the strain and delay recognition of problem loans. The government has introduced tax breaks and soft loans to help virus-hit businesses. The central bank has recently made multiple cuts to its benchmark interest rate, which is now at a record low of 0.75%. Banks have been quick to pass on the lower rates to customer. Finally, we note that supporting micro-SMEs has been part of the national agenda since 2014, with the government allocating significant investment and resources to ensure they are competitive and viable. We believe strong support will be extended to the more vulnerable SMEs, such that the negative impact from COVID-19 will be manageable for businesses and banks.

Thai banks have high provision coverage ratios of upwards of 150%. They may partially dip into their provisions. In our base case credit cost may rise only by 60 basis points, in the current year. Thailand's household leverage, at 79%, is one of the highest among emerging markets. If the economic weakness is accompanied by job losses in the tourism and general commercial sectors, it could lead to higher delinquencies with a severe hit on asset quality. The credit profiles of banks with limited buffer could come under strain.

Related Research

  • Scenario and Sensitivity Analysis: Australian Banks Resilient To COVID-19 Crisis, April 1, 2020
  • New Zealand Banks Buckle Down For Lockdown, March 31, 2020
  • Credit Conditions Asia-Pacific: As Bad As 1997, March 30, 2020
  • COVID-19 Hits Indonesia Banks On Multiple Fronts, March 26, 2020
  • Downside Risks To Australian Property Prices Not Yet Alarming For Banks, March 25, 2020
  • Asia-Pacific Economic Forecasts: The Cost Of Coronavirus Is Now US$620 Billion, March 23, 2020
  • RBA's A$90 Billion Funding Salvo Softens COVID-19 Blow For Australian Banks, March 20, 2020
  • Asia-Pacific Credits Wobble As COVID-19 Goes Global, March 10, 2020
  • COVID-19 Means Another Year Of Single-Digit Loan Growth For Philippine Banks, March 9, 2020
  • NPLs To Rise For Malaysian Banks As Political Uncertainty Adds To COVID-19 Blow, March 5, 2020
  • Economic Research: COVID-19 Now Threatens More Damage To Asia-Pacific, March 5, 2020
  • Global Credit Conditions: COVID-19's Darkening Shadow, March 3, 2020
  • China Banks And Coronavirus: Forbearance Today, Diminished Standards Tomorrow, Feb. 20, 2020
  • COVID-19 Will Hit Asia-Pacific Economies Hard, Feb. 18, 2020
  • Credit FAQ: Coronavirus And Its Possible Impact On Global Sovereign Ratings, Feb. 13, 2020
  • Coronavirus Casts Shadow On Global Credit Conditions, S&P Global Says, Feb. 11, 2020
  • Coronavirus Impact: Taiwan's Financial Sectors Can Stave Off The Threat For Now, Feb. 7, 2020
  • Korean Banks Will Likely Weather Headwinds Arising From Coronavirus, Feb. 5, 2020
  • Coronavirus Will Test The Resilience Of Thai Banks, Feb. 5, 2020
  • Coronavirus Spells More Trouble For Hong Kong Banks, Feb. 3, 2020
  • Singapore Banks Can Draw On Buffers As Coronavirus Spreads, Feb. 2, 2020
  • China Banks May Not Be As Resilient As Numbers Suggest, Jan. 30, 2020

This report does not constitute a rating action.

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Primary Credit Analysts:Gavin J Gunning, Melbourne (61) 3-9631-2092;
Vera Chaplin, Melbourne (61) 3-9631-2058;
Harry Hu, CFA, Hong Kong (852) 2533-3571;
Geeta Chugh, Mumbai (91) 22-3342-1910;
Ryoji Yoshizawa, Tokyo (81) 3-4550-8453;
Sharad Jain, Melbourne (61) 3-9631-2077;
Research Assistant:Priyal Shah, CFA, Mumbai

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back