STANDARD and Poor’s (S&P) expects the top 41 banks in the Asia-Pacific region, including three Malaysian banks, to enjoy stable prospects next year even as the slowdown in China remains a hot spot.
Although credit costs may rise, they will be at a gradual pace due to the region’s relatively high gross domestic product growth compared with global standards.
Major banks in the Asia-Pacific region are expected to step up cross-border expansion, given the region’s increasing economic linkages and the banks’ persistent appetite for higher yields, the credit rating agency said.
For instance, CIMB Group Holdings Bhd and RHB Capital are awaiting regulatory approval for their planned merger.
“The move will strengthen their regional and domestic presence and make the combined entity the fourth-largest player within the Association of Southeast Asian Nations (Asean).”
The Asean Economic Community (AEC), which will take effect next year, aims to liberalise the flow of goods, services, investment, capital and skilled labour between Southeast Asian countries.
“Although the liberalisation of the financial sector in the region faces numerous hurdles, we expect cross-border expansion and competition to intensify.”
The three local banks in S&P’s good books are: CIMB Bank Bhd (A-/Stable/A-2; axAA/axA-1), Malayan Banking Bhd (A-/Stable/A-2; axAA/axA-1) and Public Bank Bhd (A-/Stable/A-2; axAA/axA-1).
It has projected CIMB’s loan book to grow by between eight per cent and 10 per cent this year. While its domestic loan growth slowed in the first half of this year, its overseas loans will remain major growth drivers.
The bank’s asset quality is likely to remain stable due to its manageable growth pattern.
S&P expects Maybank to deepen its footprint in Asean, which will enable its total loan portfolio to grow by about 10 per cent this year.
Its profits for this year are, however, expected to be slightly lower than last year because of a compression in net interest margins and lower non-interest income as a result of a less favourable capital market.
Its tier-1 capital ratio as of June 30 this year, remains satisfactory at 13.2 per cent, supported by retained earnings and issuance of new shares, pursuant to a dividend reinvestment scheme.
In the case of Public Bank, it expects the RM4.83 billion rights issue in August to raise its tier-1 capital ratio to 12.1 per cent from 10.4 per cent.
Together with its total capital ratio, lifted from 13.8 per cent to 16.1 per cent, these levels are comfortably above the regulatory minimum, and place the bank in a good position to meet capital buffers that the country’s banking regulator will introduce under Basel III.
Public Bank will remain focused on the retail and hire-purchase segments, which account for 82 per cent of its portfolio. Its loan growth is likely to be 10 to 12 per cent, above the industry average of eight to 10 per cent.
S&P said that increasing exposure to emerging markets will likely bring higher credit risks to Asia-Pacific banks.
Banks would need to rely more on foreign-currency funding and, as a result, become susceptible to the volatility of global market conditions.
“We believe, however, proper risk management, combined with gradual expansion strategies, could mitigate these risks for major banks.”
S&P also observed that unlike Europe and the United States (US), the vast majority of governments in the region were “highly supportive” and believe they will take proactive measures to support creditors in their respective banking sectors.
One of the key risk factors is sluggish economic environment, which could see a sharp rise in credit costs and banks will not be able to absorb costs through their subdued interest margins.
“Currently, however, we think there is a low possibility of such scenario unfolding. Major banks could be impacted by a weaker-than-expected domestic demand and a global slowdown. In particular, a hard landing in China, an adverse market reaction to the US Federal Reserve’s monetary policy normalisation.”
It also warned that for banks in Australia, Hong Kong, Malaysia, New Zealand and Singapore, a plunge in real estate prices is a risk factor because home and property-related loans account for about 30 to 50 per cent of lending.
A tighter monetary policy in the US and subsequent run-up of market rates could trigger interest rate hikes in global and and local markets.
“We see a high probability of this scenario occurring in some countries such as Singapore and Hong Kong, because both countries have managed their currencies through short-term rates that follow market rates in the US.