Tougher ride ahead for S-E Asia's banks

MORGAN Stanley's Asian economics team, led by my colleague Deyi Tan, remains concerned about the impact of trade tensions on GDP growth in the region. In particular the team worries that continued uncertainty will affect investment activity and that downside risks to forecasts are increasing. In early July, it lowered its 2019 Asia (ex-Japan) GDP forecast further to 5.6 per cent, a slowdown from 6.2 per cent in 2018. If this forecast is achieved, it will be the lowest annual growth rate since the Global Financial Crisis.

We expect Asean countries to be affected because they are trading partners with the US, Europe and China. Singapore's economy is most exposed given its high level of financial and trade linkages. We expect that Singapore GDP growth will slow to 1.5 per cent in 2019 (from 3.1 per cent in 2018). Malaysia and Thailand will also experience some pressures in our view (we see Thailand GDP growth falling to 2.8 per cent in 2019e), whilst the more domestically focused Indonesia and the Philippines would be less exposed, with GDP growth remaining in the 5-6 per cent range for both.

As someone who looks at the region's banks, I am interested in how this growth slowdown will affect bank earnings and share prices. Typically, a softer economy will drive a slowdown in loan growth, softer fees and an increase in credit risks. In addition, a growth slowdown can be accompanied by lower interest rates (we expect the US Federal Reserve to cut rates this week) and in most cases, as rates fall so does the interest income that banks earn. Given that many banks in South-East Asia cannot offset all of this through lower deposit rates, their net interest margin (commonly known as NIM) falls.