Global banking sector well capitalised amid uncertainty, but China is still a risk factor for Apac players

THE global banking sector will likely remain resilient in the face of next year’s macroeconomic risks, thanks to strong capitalisation and asset quality across most banks, analysts said. Singapore banks, in particular, are well positioned as they have strong fundamentals and net interest margins (NIMs).

But China’s economic uncertainty will be a crucial factor determining the health of the Asia-Pacific banking sector – and it is no small contributor to the revenue of local banks.

In a webinar on Tuesday (Nov 22), S&P Global Ratings senior director Geeta Chugh noted that the direct impact of China’s property market downturn on banks in the Asia-Pacific region still looks manageable at this stage.

But downside pressures could build if the latest suspension in mortgage repayments by some credit groups in China is not managed well.

Chugh was making her comments following a report published on Nov 17, in which the credit ratings agency noted that global banks have been much better capitalised since the global financial crisis in 2008. It believes most banks will have sufficient provisioning, capital and other buffers against weaker macroeconomic and financing conditions in 2023.

But if inflation remains higher for longer and the employment rate falls, corporate borrowers will likely face higher pressure. This would in turn increase the default rate and non-performing loans for banks.

Chugh expects banks in the Asia-Pacific will likely post higher credit costs and non-performing assets than during pre-Covid times.

Singapore’s banks, however, are likely to come out ahead of their peers in the region, she said.

While the earnings of all banks will likely improve with rising interest rates, Chugh said the recovery is “more for the likes of Singapore banks, which are able to pass through fees, and less for Philippine or Thai banks, which either face high competition, or (operate in an environment where) lenders are more cautious about the impact of interest rates on asset quality”.

SEE ALSO

Banks are raising interest rates even as investors have been piling into stocks – what happens now?

China developers soar as state help fuels bets on market bottom

Investors in Asian stocks need patience – until China economy and equities improve

Her colleague, S&P primary credit analyst Ivan Tan, said the growth story for Singapore’s banks next year will come from continued upside for NIMs, as interest rates rise.

“Balance sheets of the large Singapore banks are rate-sensitive and benefit from an extensive buffer of low-cost customer deposits,” Tan said.

Their views were echoed by several other sector analysts.

Thilan Wickramasinghe, Maybank’s head of research in Singapore, also expects the growth in NIMs for Singapore’s banks to more than offset any loan growth weakness.

“At the same time, if there is improved clarity in the rate cycle, areas such as wealth management should see recovery,” he added.

DBS analyst Lim Rui Wen said a key earnings driver for Singapore banks would be a recovery of non-interest income from its current low base.

Slower economic growth and rising rates could still pressure businesses and individuals, and in turn affect the asset quality of Singapore banks, Maybank’s Wickramasinghe said.

But S&P’s Tan also flagged that the increased vulnerability of small and mid-sized enterprises amid an economic downturn could also weaken banks’ non-performing loans ratios.

Tan said he has “become more circumspect” on mainland China and the regional economies that Singapore banks are exposed to, with China’s economy likely hit by its property downturn and strict Covid-19 curbs.

Chugh also noted that recovery from the Covid-19 pandemic is still a drag for Thailand and Indonesia in South-east Asia.

On the other hand, Maybank’s Wickramasinghe, said China’s reopening could benefit the region with a revival in exports, inbound tourism and supply-chain shifts.