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Covid-19 crisis seen adding US$100 billion to Asian bank credit costs

Hong Kong

THE novel coronavirus outbreak will add US$100 billion in credit losses to banks in the Asia-Pacific region this year with Chinese lenders bearing the brunt of the damage, according to S&P Global.

"Some activity will be lost forever," Shaun Roache, S&P's Asia-Pacific chief economist, wrote in a note on Tuesday. "We estimate an income loss of about US$211 billion, which will blow a hole in balance sheets across the region."

The ability of Asian lenders to weather the virus outbreak, which now has claimed more than 3,900 lives worldwide, has larger implications for the global financial system. Asia accounts for a bigger share of pre-tax banking profits than any other region, according to a report from McKinsey & Co.

The Covid-19 crisis will likely exert sharp, short-term pressure on Chinese banks and almost a quarter of the ratings and outlooks on the Chinese property sector may come under pressure, S&P said in the report.

"China's regulatory response so far has been to use the banking system to cushion the economic impact of the epidemic, and provide financing to entities crucial to medical support and containment of the virus," S&P credit analyst Harry Hu said. "Banks may need to sacrifice near-term commercial interests, straining institutions already facing capital pressure."

While Beijing has asked banks to step up with support, it has also acted to mitigate the chaos. Authorities are now allowing the nation's lenders to delay recognising bad loans from smaller businesses, giving temporary reprieve to trillions of yuan of debt.

Regulators also told lenders not to downgrade loans with missed payments or report delinquencies to the country's centralised credit-scoring system before the end of June, according to the statement.

S&P said given the relaxed recognition of bad loans, reported non-performing loan ratios for China's banks could "moderately" rise to 2.2 per cent this year, up from 1.86 per cent at the end of 2019. The questionable loan ratio could peak at as much as 11.9 per cent in the aftermath of the epidemic, S&P said.

Property transactions in China may remain on hiatus for the coming weeks and construction is also largely paused. Leverage and profitability may deteriorate in the next one to two years, denting credit profiles in the sector, S&P said.

Foreign banks are also feeling the heat. HSBC Holdings, which generated half its 2019 revenue in Asia, said in the most extreme scenario - in which the virus continues into the second half of 2020 - it could see US$600 million in additional loan losses. BLOOMBERG