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Asian banks resilient to changing financial conditions: Moody's

Changes to global monetary conditions such as higher US interest rates may introduce new pockets of risk for Asia's banks, but the institutions in the region "will prove resilient", says the ratings agency.

SINGAPORE: As global financial conditions shift, pockets of risks will emerge that Asian banks, excluding those in Japan, will have to contend with, said ratings agency Moody's on Wednesday (July 16).

The long, positive credit cycle enjoyed by the banks in the region may be about to peak, introducing new challenges for lenders, Moody's said. One example of this is the gradually rising United States interest rate, which would result in higher interest rates in Asia.

As a result, a small share of overstretched borrowers in Asia could face difficulties servicing their loans, leading to somewhat higher problem loans for the banks in the region. For example, because households in Malaysia and Thailand have borrowed more extensively than those in other Asian markets, their household debt-to-GDP ratios reached 85 per cent and 70 per cent, respectively, and are a potential risk, the agency stated.

Furthermore, corporate leverage ratios in emerging Asian economies like China, Thailand, India, Indonesia and the Philippines have deteriorated. Moody's said this trend indicated that the quality of corporate exposures in Asia's emerging markets may deteriorate to a somewhat greater extent, compared to the more advanced markets with more stable leverage ratios.

That said, most Asian banking systems are characterised by low levels of problem loans, ranging from Hong Kong's 0.5 per cent to South-East Asia's 2 per cent as of end-2013. As a result, any deterioration in the quality of loans is starting from a strong base, it said.

The bank's profitability levels are also healthy, with average pre-provision incomes to risk weighted assets of around 3 per cent, and net income to risk weighed assets of around 2 per cent, the agency added.

Mr Eugene Tarzimanov, Vice-President and Senior Credit Officer at Moody's Financial Institutions Group in Asia Pacific, said: "On balance, the credit profile of banks in Asia will prove resilient to the adverse effects of higher interest rates, such as somewhat higher problem loans, because of their strong internal buffers."

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