By SHAHEERA AZNAM SHAH
THE profitability and asset quality of financial institutions in the Asia Pacific (APAC) countries are at risk if the coronavirus outbreak is not contained in the next several months.
The prolonged spread of the virus would impact banks’ credit profile which will slow down the pace of a country’s economic growth, Moody’s Investors Service wrote in a report yesterday.
“The severity and length of the outbreak remain highly uncertain. If the virus-related disruptions are short-lived, there will be a limited credit impact on APAC economies and banks. However, the outbreak can also last for a prolonged period and become more severe,” it said.
The rating agency added that the decline in commodity prices could have a rapid “knock-off” effect on banks.
The impact of the loss in commodity prices will trickle down to banks through the exposures in the commodity-related companies such as in energy, metals and agriculture industries.
“China is a key consumer and importer of various commodities and long-lasting production halts in that country would lead to a drop in demand for those commodities and depress their prices.
“Substantial drops in commodity prices can lead to growth in impaired loans to commodity related industries,” it said.
Commodity prices already declined moderately in January amid investor concerns about weakening demand from China in the aftermath of the outbreak, it said.
“The virus outbreak comes at a time when APAC banks are already grappling with slowing economic and credit growth, as well as falling interest rates, which will weaken their profitability and asset quality,” Moody’s said.
It added that APAC governments and regulators are expected to take counter-measures such as fiscal stimulus, monetary policy easing and removal of some macroprudential measures to support their economies and mitigate the negative impact of the outbreak on banks.
The volatility of the financial markets would be one of the major factors contributing to the risk at APAC banks, Moody’s said.
“While financial markets have recovered from virus-related selloffs, further drops in prices of financial assets are expected if the outbreak persists.
“While short-term volatility can be good for bank earnings from financial markets, sustained market declines will be a credit-negative for the banks due to market losses on financial investments and falls in revenue from financial markets,” it said.
APAC central banks are likely to cut rates to counter the slowing economic growth, the consequent falls in government bond yields will allow banks to book revaluation gains on their bond investments held at fair value.
“It shows that banks in Australia, Vietnam and Indonesia stand to benefit the most from declining bond yields because they have larger investments in sovereign bonds at a fair value relative to total assets.
“Banks in Japan also have large investments in government bonds, but these securities have negative or ultra-low yields,” it said.
The rating agency said countries which had a rapid appreciation of the property market, including Malaysia, will encounter an increase in losses on mortgages and other property exposures.
“Further material disruptions caused by the outbreak can weaken economic growth and investor confidence, resulting in a decline in real estate prices.
“This would lead to increases in losses on mortgages and other property exposures. In this scenario, banks in economies that have seen a rapid appreciation of property prices in the past decade, such as those in Hong Kong, Australia, Malaysia and India, would be most at risk.
“The continued travel restrictions could directly affect demand for property assets in some markets given the importance of Chinese buyers, such as in Australia and Hong Kong,” it said.