BANKING OUTLOOK
Inflation, weak economies to erode Asia Pacific banks’ buffers in 2023 The falling valuation of assets worldwide and supply disruptions weigh on banks’ profits. ASIA PACIFIC
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inancial industries should brace for tough times as analysts forecast a difficult year ahead. Banks’ buffers, built over the past decade, are expected to come into test amidst a period of rising interest rates, inflation, and weakening economies, S&P Global Ratings noted in its annual banking outlook. “Higher inflation and weakening economies may eventually catch up with banks. Inflation is at 40-year highs in some banking jurisdictions, and this is feeding into higher. Inflation is also putting the brakes on the outlook for economic growth,” the ratings agency warned. Quintuple whammy In a banking review, McKinsey & Co. listed five shocks affecting banks globally, including those in APAC, as a result of the longtail effects of the COVID-19 pandemic and ongoing geopolitical tensions in Europe and East Asia: macroeconomic shock; asset value shock; energy and food supply shock; supply chain shock; and talent shock. “Soaring inflation and the likelihood of recession are sorely testing central banks, even as they seek to rein in their quantitativeeasing policies,” McKinsey wrote. Another notable issue that banks face is falling valuations of assets worldwide. In China, the decline is felt especially from its property market, which in turn will contribute to its expected slowing loan growth. In a separate report, S&P Global Ratings Senior Director & Sector Lead Analyst Harry Hu said that the country’s overall loan growth will likely come at below 10% in 2023, worsening from the 10.6% expected for the full year of 2022. “A moderately easing monetary environment, fierce deposit competition, and concessional loan rates to policy-preferred sectors continue to erode the sector’s profitability. Property development stress lingers despite initiatives to contain the risk,” Hu noted. 18 ASIAN BANKING & FINANCE | Q1 2023
APAC banking systems should be able to weather the deteriorating global economic landscape in 2023 better than other regions: S&P Global
Inflation is at 40-year highs in some banking jurisdictions
Harry Hu
China is not the only market with property woes. Property sector refinancing risk has also risen in Vietnam, S&P analysts noted. In contrast, Australia, New Zealand, Hong Kong, and South Korea are experiencing house price declines after years of sustained increases. “A sudden drop in market confidence could heighten systemic risks,” the analysts said. “Nevertheless, healthy loan-to-value ratios in Hong Kong, South Korea, and Singapore; healthy mortgage insurance in Australia; and debt serviceability limits and tests in all four markets should partly mitigate asset quality risks.” Fintechs and cryptocurrencies are noted to also be losing their values. The crypto industry in particular is in tough times, with notable high-profile bankruptcies of cryptocurrency organisations, most recently that of cryptocurrency exchange FTX.
Banks will also be affected by disruptions to the energy and food supply related to the war in Ukraine. The ongoing conflict reportedly contributes to inflation and puts millions of livelihoods at risk, McKinsey warned. Supply chain disruptions that began during the pandemic persist, and continue to affect global markets. The fifth shock is related to employment. COVID-19 has reshaped and shrunk the talent pool as more people began to work remotely or left the workforce altogether to join what McKinsey calls “the great attrition.” Some rise, some fall In Asia Pacific, a gap will exist between the performance of banks in emerging markets (EM) and those in developing markets (DM). “We expect most APAC EM banking systems to report steady
