Asia-Pacific banks' property exposure rising: Fitch report

ASIA-PACIFIC banks are increasingly exposed to property risks, with Vietnam among those facing elevated risk due to low loss-absorption buffers, Fitch Ratings analysts said in a special report on Sept 17.

In the report, which covered eight developed and nine emerging markets, Australia and New Zealand were flagged as those most exposed to property stress.

Of the Asean countries, Singapore was seen as facing medium exposure, with medium or high buffers. Its household leverage has fallen since 2014, to 67 per cent in 2018, and is expected to moderate further as property cooling measures dampen sentiment.

In general, the emerging markets -- except Malaysia -- have much lower property-related exposure than the developed ones. In the Asean emerging markets, Indonesia was deemed as having low exposure, while the Philippines has medium/low exposure.

Both Malaysia and Thailand have household leverage that is high but that "should continue to moderate on weaker property-loan momentum and regulatory curbs", said the report.

"Banks in both markets hold buffers sufficient to absorb considerable property-related stress, but such an event - not our base case - could still lead to negative rating action."

On Thailand, the analysts said: "In our view, the most likely trigger for a property fallout would be in the event of a significant increase in unemployment or sharp hikes in interest rates, neither of which are our base-case expectation."

MALAYSIA

Malaysia's property exposure was the highest in emerging Asia, with real estate loans forming 31 per cent of banking system assets at end-March 2019.

However, the authorities are alert to rising sector risks, as are banks, and GDP growth is expected to stay resilient at around 4.5 per cent. "All this should continue to support asset quality ... although the property sector remains an area of potential vulnerability for the banking sector in the event of any significant deterioration in the operating environment - including external risks," said the report.

VIETNAM

Vietnam, with a ratio of household debt to GDP of 58 per cent, faces higher risk given rapid consumer loan growth, large legacy bad-debt issues and thin capital buffers, said the report.

"Banks' exposure to property is also understated, as real estate is used as key loan collateral." But the report noted that "the near-term risk of property fallout seems remote, in light of a benign environment".

The report acknowledged that exposure to property for markets such as Vietnam, and potentially also the Philippines and Indonesia, could be understated due to indirect exposure and/or limited data transparency.

For instance, conglomerate group structures in the Philippines raise contagion risks from the property arms to their affiliate companies, which raies the banking sector's indirect exposure to a property downturn.