Most Emerging Market Banking Systems Remain Sound, but Pressures Build at Chinese Banks

In a special report Fitch Ratings says that rapid Chinese credit expansion since 2008 is starting to manifest itself in early signs of strain. However, Fitch continues to view emerging market loan growth elsewhere in Asia, Latin America (LatAm), Europe and the Gulf Co-operation Council (GCC) as less high risk, with system metrics generally sound. Risks for central and eastern European (CEE) banks arising from the eurozone crisis remain significant, and asset quality remains vulnerable in several CEE and former Soviet Union (FSU) markets.

Pressures are emerging in the aftermath of the Chinese credit boom. Non-performing and special-mention loans have been rising since Q411, but remain low and vastly understated. More importantly, bank cash cushions are thinning as deposit growth slows and forbearance reduces loan repayments. In the past, abundant liquidity enabled banks to carry non-performing loans (NPLs) with minimal disruption. Current levels of thinning liquidity means asset quality stress could be more disorderly and begin to crowd out new lending, weighing on gross domestic product (GDP) growth.

Loan growth across most of LatAm and in some emerging markets in Asia (notably, India and Indonesia) and Europe (Turkey and Russia) remained rapid in 2011. However, risks are mitigated by modest loans/GDP ratios; mostly sound asset quality, capital and funding ratios; and solid GDP growth. Loan growth is likely to slow in 2012 due to the weaker global outlook, emerging market policy moves and base effects. However, with limited signs of a credit slowdown in H211/Q112 (with the exception of Turkey), the adjustment may only be moderate.

The credit build-up had a limited impact on key metrics of emerging market banking systems in 2011. Increases in loans/GDP ratios were significant (but still moderate) only in Thailand and Turkey, as fast credit and economic growth generally coincided. Most growth markets have seen little erosion of capital ratios (due to solid earnings) or spikes in loans/deposits ratios (as deposit growth remained robust). NPL ratios remained stable and mostly low in growth markets in 2011, although a modest increase in 2012 is possible as the credit expansion slows.

Risks for CEE banks arising from the eurozone crisis remain significant, given the region’s export dependence, bank ownership and potential currency weaknesses in case of further eurozone stress. Asset quality and solvency risks remain high in Slovenia due to the weak and highly leveraged corporate sector and NPL ratios in other countries across the southern part of the region (Hungary, Romania, Bulgaria and Croatia) are all in double figures and have yet to peak.

Fitch expects credit metrics of banks in Russia and most other FSU countries to be stable in 2012 as high commodity prices support economic growth, and hence also banks’ asset quality and performance. However, the Kazakh and Ukrainian systems still suffer from high NPLs and potentially weak capitalisation, and Fitch expects only limited near-term progress with loan workouts. Asset quality remains highly vulnerable at Belarusian banks following the devaluation, sharp credit slowdown and interest rate hikes in 2011.

Most GCC banking systems continue to report sound numbers, with high capital ratios, low NPLs, and mainly deposit funding. Credit growth picked up in Qatar and, to a lesser extent, Oman and Saudi Arabia, in 2011. This will increase loan concentrations and real estate exposure, but government support for economies and banking systems mitigates these risks. Downside asset quality risks remain in UAE, but Fitch believes NPLs have peaked in Kuwait and expects the near-term impact on Bahraini banks of the social unrest to be limited.


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