Slowdown in Emerging Market Credit Growth Likely in 2012, According to Fitch

Fitch Ratings has published a special report saying that credit growth in emerging markets (EMs) is likely to slow in 2012 due to the weaker global economic outlook, policy moves by EM authorities to prevent overheating and base effects. Banking systems in most EMs which experienced rapid credit growth in 2010-1H11 remain sound. However, an increase in non-performing loans (NPLs) in these markets from currently low levels is likely in 2012 as portfolios start to season.

A marked deterioration of asset quality remains a possibility in China, where credit growth remained rapid in 9M11, albeit with moderate deceleration in 3Q11, and non-deposit funding is increasingly being used to finance balance sheet growth. In Fitch’s view, loan impairment is under-reported, and capitalisation is weak. However, the agency believes that the cost of any sector recapitalisation will likely be borne by the sovereign.

Elsewhere, several EMs in Latin America (including Brazil, Colombia and Peru), Asia (India, Indonesia and Sri Lanka) and Europe (Turkey, Russia and Georgia) reported further rapid loan growth in 1H11. However, risks are mitigated in these markets by modest loans/gross domestic product (GDP) ratios; mostly sound asset quality, capital and funding ratios; and solid GDP growth. A slowdown in loan expansion was already evident in Turkey in 3Q11, and is likely to become more visible in 4Q11-2012 in other EMs which have experienced rapid credit growth.

The credit build-up had a limited impact on key system metrics in 1H11, as in 2010. Increases in loans/GDP ratios were significant (but still moderate) only in Turkey and Colombia, as fast credit and economic growth have generally coincided across EMs. Turkey has also seen a reduction in margins and capital ratios and a higher loans/deposits ratio, but each of these indicators still remains sound. Other growth markets have seen little erosion of capital (due to solid earnings) and generally maintained loans/deposits ratios (as a result of deposit growth).

NPL ratios have been stable and mostly low across EM growth markets. Fitch expects ratios to increase in 2012 as credit expansion slows and loan books season, but believes a sharp deterioration is unlikely barring a severe deterioration in the global outlook. However, in China and Belarus, NPLs could rise markedly on the back of rapid growth, weak underwriting, high leverage (China) and a currency devaluation (Belarus).

Economic and loan growth have remained slow across central and eastern Europe (CEE), and eurozone exposure is high due to dependence on western European export markets, the risk of parent bank retrenchment and potential weakness in CEE currencies. Further bank sales are possible, as some owners reassess strategy in the region, but Fitch expects major Italian and Austrian players to remain committed. Risks are highest in Slovenia and Hungary due to weak asset quality and funding, high corporate leverage (Slovenia) and FX retail lending (Hungary).

Banks’ profitability and asset quality in the countries of the former Soviet Union (Belarus excepted) have stabilised as high commodity prices have supported economies. However, the Kazakh and Ukrainian systems still suffer from high problem loans, negative profitability, potentially weak capitalisation (due to accrued interest in Kazakhstan and low coverage of restructured loans in Ukraine) and (in Kazakhstan) tight margins. The performance of Russian banks, like the broader economy, is likely to remain highly cyclical and dependent on the oil price.

Most banking systems in the countries of the Gulf Co-operation Council (GCC) continue to report sound numbers, with strong capital, low NPLs, moderate post-crisis growth and mainly deposit funding. However, asset quality is notably weaker in Kuwait and United Arab Emirates (UAE) (where, in Fitch’s view, there is further downside) than elsewhere. Fitch expects a moderate, but manageable, deterioration in asset quality in Egypt.


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