Asian Banks Closing Credit Gap on Western Peers

Asian banks are demonstrating a relative improvement in their underlying credit fundamentals and ratings, especially when compared with their global peers, says Moody’s Investors Service. The credit ratings agency (CRA) issued a commentary to coincide with its annual Asian Banking and Sovereign Conference, held in Hong Kong on 28 June.

“The ratings gap that had long separated banks in Asia from their Western peers has now essentially been closed because the stable credit quality of Asian banks throughout the global financial crisis has resulted in a comparative improvement in their ratings,” said Stephen Long, Moody’s Hong Kong-based managing director. “In contrast to Western banks that have experienced significant credit quality challenges since the outset of the global financial crisis, Asian banks are only moderately leveraged, largely deposit funded and generally conservative in their lending.”

Moody’s said, however, that the analysis presented during the conference highlighted that Asian banks are not without risk. Its analysts pointed out that most banks have benefited from economic stimuli at the outset of the crisis and have also taken advantage of the opportunities created by the retreat from Asia of European and other foreign banks, which the CRA’s credit analysts see as a double-edged sword in some banking systems.

“Rapid growth in new borrower segments and outside many of the banks’ traditional markets has contributed to improved asset quality and profitability metrics to date, but it has also made Asian banks take on sizeable new risks,” said Long. “Given the evolving credit profile of Asian banks, it is important to continuously update stress tests to reflect these changes and assess their resilience in an economic downturn. The biggest risk to the banks is the contagion from the euro area through trade channels.”

However, as indicated by Moody’s stable outlooks on Asian banking systems, the CRA’s analysis concludes that the majority of banks in the region have built sufficient buffers to sustain a worse-than-expected economic scenario. A lower probability, but a more damaging downside risk than euro area contagion for Asian banks, is a hard landing in China.


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