Difficult time ahead for Asia’s banking system

by ASILA JALIL/ pic by TMR FILE

BANKING systems in Asia will face a difficult landscape in the coming quarters due to the Covid-19 outbreak despite receiving stable government support.

Moody’s Investors Service Inc revealed that weaker economic prospects and widespread financial market upheaval will present a more adverse credit landscape for banks in the Asia-Pacific region.

“While the region’s banks generally have adequate capital and liquidity buffers to weather the crisis, reduced business activity, lower (or more volatile) asset prices and higher unemployment will weigh on debt affordability and loan repayment,” it said in the report yesterday.

Moody’s has given negative outlooks on 16 banking systems in the region, including Malaysia.

It said banking sector profitability will also decline due to higher loan-loss provisions from deteriorating asset quality, lower net interest margin caused by lower policy rates and lower fee income on subdued business activity.

Monetary loosening will support banks’ access to funding, as well as mitigating system liquidity risks, said Moody’s, while several monetary authorities will rely on other policy tools such as relaxing reserve requirement ratios or providing liquidity injections.

“However, these cuts will not likely result in a major expansion in lending and economic activity because the reserve ratio for small banks was low to begin with (7%) and banks will generally favour capital preservation over lending to higher-risk small and medium enterprises in a weak economic environment,” it said.

Debt moratoriums implemented by countries such as Malaysia, China and other Asian economies may provide temporary relief to borrowers, but these measures will also constrain banks’ abilities to take proactive restructuring and recovery actions.

In a statement, Moody’s said the coronavirus crisis is manifesting itself through three types of shocks in the region which are country-specific, regional and second-round, while government relief measures will not be enough to offset the effects on the economy.

“Widespread containment measures are crippling domestic consumption and production, which is spilling over to other parts of the region in the form of lower demand for commodities, imported goods and services, and supply chain disruptions,” said Moody’s assistant VP Deborah Tan.

In its report, Moody’s added that stimulus package which includes direct support to households will only partly offset the negative effects on consumer sentiment and potential loss of income.

It noted assistance such as direct cash assistance that is being done in both Singapore and Malaysia will not be sufficient to offset income drops for furloughed workers or layoffs that take place in affected sectors.

“The impact of rising unemployment will have repercussions on the trajectory of the economic recovery,” said Moody’s.

It added that economic spillovers from country-specific shocks are quickly escalating into second-round shocks.

While China has resumed production, other Asian countries are still battling with the outbreak, it said.

“We expect the second-round effects of weaker regional growth to linger as countries gradually loosen their respective restrictions on movement and business activity.

“Demand for imported goods and services will be slow to recover as domestic economic slowdowns weaken household purchasing power. This will continue to weigh on regional exports, particularly on tourism and retail,” it said.