Rising asset risks on virus surge, but credit strength to remain intact for Asean, Indian banks: report

ASSET risks for banks will rise in most parts of Asean and India as the region battles new waves of coronavirus infections and low vaccination rates. That being said, banks' strong loss-absorbing buffers, policy support and the virus impact focused on a few segments will keep their credit strength intact, said Moody's Investors Service in a new report.

For India, Moody's projects the economy will return to growth in the fiscal year ending March 2022 (fiscal 2021), but the severe second coronavirus outbreak will delay improvements in asset quality.

By contrast, the resumption of global economic activity will boost trade growth in Vietnam, Malaysia and Singapore. This will help offset domestic economic disruptions from the pandemic, although slow deployment of vaccines is a risk for Vietnam, it said in its report, the first in a series covering the impact of fresh coronavirus waves on banks in Asean and India.

"Banks in Thailand, the Philippines, and Indonesia are particularly vulnerable as their economies struggle with elevated numbers of virus cases, spiking uncertainties regarding their economies reopening," said Rebecca Tan, a Moody's vice-president and senior analyst.

That being said, beyond the pandemic, Asean and India will likely register faster growth than most other regions in 2021-22. This is a positive for banks, although performance across the region will increasingly diverge because of the differing extent of economic scarring caused by the pandemic, it noted.

Banks will also continue to benefit from robust trade within Asia, thanks to greater integration through various free trade agreements, as well as rising income in the region.

A push among companies to diversify supply chains away from China, which initially started because of the China-US trade tensions and has been further cemented by the pandemic, will draw more investment into economies in this region that not only have stronger economic fundamentals, but also those, such as Vietnam, with demonstrated track records of pandemic management, supporting the countries' economic growth and banks' profitability, added Moody's.

Finally, the growing young populations in economies such as India, Indonesia, Malaysia and the Philippines could help accelerate economic expansion and boost overall wealth, which will lead more people to engage banking services. However, this will depend highly on the governments' ability to support domestic labour markets.