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SE Asia banking faces tougher year, says S&P

Publication Date : 12-02-2014


Banks in most Southeast Asian countries will face tougher operating conditions this year because of lower economic growth prospects and tighter credit conditions, according to Standard & Poor's Ratings Services.

Household indebtedness in Singapore, Thailand and Malaysia has been increasing since 2008, leaving these banking systems vulnerable to rising interest rates. The US Federal Reserve's tapering of its bond-purchase programme could lead to higher interest rates and asset-quality pressure.

Malaysia's households in particular could land in a tight spot due to high leverage relative to modest income.

Economic imbalances from high property prices could strain households' debt-servicing capacity when the credit cycle turns.

Malaysian banks are particularly vulnerable to deterioration in households' economic health, since that sector accounts for about 57 per cent of the banking system's loans. Credit risks are also high, given Malaysia's fairly large private-sector debt burden relative to the country's modest income levels.

However, in S&P's base case, it expects the government's policy intervention to curb the rise in property prices and household debt. Downgrades would be likely if its base-case expectations failed to materialise.

Vietnamese banks' asset quality, profitability and capitalisation will remain weak, even as the economy recovers. The true extent of asset-quality problems is understated because of poor disclosures and lenient classification standards.


A continued deterioration in Vietnamese banks' asset quality or capitalisation could lead to credit-rating downgrades. Well-executed banking reforms and consolidation are vital for the long-term sustainability of Vietnam banks, S&P says.

S&P's view of the banking systems of Singapore, Indonesia, Thailand and the Philippines is one of stability.

While it expects some deterioration in banks' financial performance in 2014, particularly for those in Indonesia, its ratings already factor in this weakening. The healthy funding and liquidity profiles and adequate capitalisation of most rated banks in these countries have put them in a position of strength going into this year.

For Thailand's banking system, political developments in the past few months have precipitated a drop in the baht and a fall in the stock market, and slowed economic activity. These conditions are expected to result in rising loan delinquencies, tighter bank margins and declining loan growth. The extent would depend on the severity and duration of the political unrest.

The protests could hurt business sentiment and consumer confidence while further pushing back structural reforms and government infrastructure spending. This could delay private- and public-sector investments.

Demand could also slow as consumers put off non-essential purchases. Bank credit growth is expected to ease to 8-10 per cent this year.

However, this could also help the economy and the banking industry because rapid credit growth in the past few years was leading to a build-up of economic imbalances.


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