Asia-Pacific banks' creditworthiness should remain largely intact through the current economic downturn, despite substantial risks, said Moody’s Investors Service.
"We expect asset quality to deteriorate significantly as economic conditions remain weak, while profitability will take a hit from rising credit costs and declining margins," said Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.
Moody's expects problem loans will double on average across the 14 APAC economies by 2022, with banks in India and Thailand to see the largest increases due to the severity of the economic shocks and the historically poor performance of certain loan types.
Meanwhile, rising credit costs and a 5%-10% drop in pre-provision income amid falling interest rates will drive a significant deterioration in profitability in coming years, the credit rating agency noted.
In line with weak operating conditions, we expect capital ratios will decline at 78% of the 218 rated APAC banks by the end of 2022 from the end of 2019, Tarzimanov warned.
"However, the decline at most rated banks will not be significant enough to prompt a change in our views on fundamental creditworthiness, which also take into account other factors such as profitability, asset quality, funding and liquidity,” he added.
