Rise in yields to affect APAC banks’ portfolio valuation

by ASILA JALIL / graphic by MZUKRI MOHAMAD

ASIA-PACIFIC (APAC) banks may face near-term losses due to a rise in yields for long-dated sovereign bonds as they recognise valuation changes on their available-for-sale (AFS) portfolios.

In a report recently, Fitch Ratings Inc noted that the 10-year US sovereign yields have risen by 81 basis points (bps) year-to-date (YTD) and over 120bps from its recent low of 0.5% in August last year.

Due to that, 10-year sovereign yields in APAC have mostly risen in tandem, which the firm said will weigh on banks’ debt securities valuations.

“Room for APAC central banks to ease monetary policy further in response to the rise in yields is limited, given record low nominal policy rates and the expansion of balance sheets from asset purchases in 2020.

“Nevertheless, we expect financial conditions to remain supportive by historical standards,” it said in the note.

Based on its data, the 10-year sovereign yields in Malaysia have risen by 80bps YTD, while Indonesia registered a YTD growth of 92bps, Hong Kong at 63bps, while India and Taiwan registered 33bps and 12bps respectively.

It said Fitch-rated banks in Malaysia, Hong Kong, India, Indonesia and Taiwan had the largest securities portfolios and were most sensitive to yields among APAC systems.

Lower yields translate to revaluation gains for most banks last year, but the YTD rise in bond yields will cause banks to recognise fair value losses in AFS portfolios through other comprehensive income for the first quarter of 2021.

Fitch said the correlation between banks’ valuations of AFS securities and quarter-on-quarter changes in domestic yields in some regional emerging markets has been strong as gains and losses are marked to market in the quarter they occur.

“In Indonesia and Malaysia, for example, AFS revaluation losses were equivalent to 10% to 15% of operating income when yields rose by 50bps or more, resulting in a correlation coefficient of nearly -90% during 2012 until 2016. The measure in Taiwan, where sovereign yields are less volatile, is only about -54%,” it said.

As for this year, it said surplus domestic liquidity has maintained Taiwan’s yields at low levels and the market is relatively insulated from the rise in US yields.

Yields in Malaysia, Hong Kong, Indonesia have risen in line with those in the US and it said there could be larger portfolio valuation reversals for banks in these jurisdictions.

“Revaluation adjustments may be milder for Hong Kong banks, which invest heavily in local exchange fund bills. Banks in Taiwan should be more insulated too, partly reflecting surplus domestic liquidity

“Core capital ratios for Fitch-rated banks in Hong Kong, Indonesia and Malaysia remain adequate to absorb minor declines in regulatory capital stemming from yield-driven portfolio revaluations,” it added.

Meanwhile in a separate note, RAM Rating Services Bhd reiterated its ‘Stable’ outlook on the Malaysian banking sector on the back of expected loan growth, ample liquidity and sturdy capital buffers.

RAM’s co-head of financial institution ratings Wong Yin Ching said loan expansion is anticipated to hover around 3% this year with household loans anchoring growth, while business loans remain sluggish.

The projection is subject to downside risks, such as unexpected delays in the vaccination programme or a new wave of Covid-19 infections, which may necessitate stricter lockdown measures.

“Based on our estimates, the industry’s gross impaired loans (GILs) ratio may come up to around 2.3%-2.5% in 2021.

“We expect GILs to peak only in 2022, after the expiration of all temporary relief measures,” said RAM’s financial institution ratings co-head Sophia Lee.

Banks’ earnings are also anticipated to improve this year with the absence of modification expenses and rejuvenated net interest margins as deposits would have mostly been repriced at lower rates.