Higher yields for long-dated sovereign bonds will result in near-term losses for Asia Pacific banks as they recognise valuation changes on their available-for-sale (AFS) bond portfolios, but the capital impact should be manageable for most rated banks, said Fitch Ratings recently.
Correlation between banks' valuations of AFS securities and changes in domestic yields has historically been strong in some Asia Pacific markets, as gains and losses are marked to market in the quarter they occur, the credit rating agency pointed out.
The latest data suggest that Fitch-rated banks in Hong Kong, India, Indonesia, Malaysia and Taiwan have the largest AFS securities portfolios, and display particular sensitivity to changes in yields, the firm noted.
In Indonesia and Malaysia, for example, AFS revaluation losses were equivalent to 10%-15% of operating income when yields rose by 50bp or more, resulting in a correlation coefficient of nearly -90% during 2012-2016, it added.
Yields in Hong Kong, Indonesia and Malaysia have recently risen in line with those in the US, according to Fitch.
The firm believes that they are likely to remain aligned with potential future increases in US yields in the near term, with banks in these systems facing associated portfolio valuation losses.
Revaluation adjustments may be milder for Hong Kong banks, which invest heavily in local exchange fund bills, the firm observed, adding that 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.
Fitch estimated that the capital impact of revaluation adjustments on Indian banks will be modest in 1Q21, but some public-sector banks with thinner capital buffers could face additional capital pressures should yields continue to rise.