Asia-Pacific banks to face portfolio valuation losses as yields rise

BANKS in the Asia-Pacific can expect near-term losses, as they mirror rising sovereign yields in the US, Fitch Ratings has said.

In a Monday report, the credit rating agency revealed that the correlation between the banks' valuations of available-for-sale (AFS) securities and changes in domestic yields has historically been strong in some Asia-Pacific markets, as gains and losses are marked to market in the quarter they occur.

This is particularly true for banks in markets with large AFS securities portfolios, such as Hong Kong, India, Indonesia, Malaysia and Taiwan.

In Indonesia and Malaysia, correlations reached nearly -90 per cent between 2012 and 2016. In Taiwan, where sovereign yields are less volatile, it was only about -54 per cent.

Yields in Hong Kong, Indonesia, and Malaysia have also recently risen with those in the US, putting them at risk of larger portfolio valuation reversals.

Revaluation adjustments may be milder for Hong Kong banks, which invest heavily in local exchange fund bills. Banks in Taiwan were also expected to be more insulated, partly reflecting the country's surplus liquidity, said the report.

That being said, the research team was confident that Fitch-rated banks will remain adequate to absorb the "minor" declines in regulatory capital stemming. In Hong Kong, Indonesia and Malaysia, the effects were estimated to be 25-40 basis points (bp); Indian banks have been forecasted to see a less than 20 bp rise in the first quarter of the year.

This is in contrast to the 81 bp rise the US has seen in the year to date.