BANKING OUTLOOK: APAC financial performance in 2023 or only mild variance versus 2022. This partly reflects our forecasts for continued robust economic growth in India and Southeast Asia, and stronger growth in China, despite the weaker external environment. This should support loan expansion, with benefits to net revenue, which will largely offset weakening asset quality,” S&P said in a recent report. In contrast, banking systems in APAC DMs–Australia, Singapore, Japan, South Korea, New Zealand, Taiwan, and Hong Kong–will post a more mixed financial performance. Loss absorption buffers in these markets should remain similar to 2022 levels, S&P said, adding that in general APAC DM banking systems should be able to weather the deteriorating global economic landscape in 2023 better than other regions globally. The exceptional and the egregious Two markets will buck the trend: Sri Lanka and Singapore. Singapore banks’ profitability metrics are expected to strengthen further to above pre-pandemic levels in 2023, even taking into account credit costs and their loan growth being hit by the ill effects of the external environment.
“Singapore banks are well placed for margin upside over 2022 and 2023 as rate hikes gain momentum. Balance sheets of large Singapore banks are rate-sensitive and benefit from an extensive buffer of low-cost customer deposits,” said Ivan Tan, Primary Credit Analyst for Singapore, S&P. Tan added that a NIM (net interest margin) expansion of 10 bps-15 bps in 2023 is possible. However, the nonperforming loan ratio could weaken over the next 18 months. “We have become more circumspect on mainland China and some regional economies to which Singapore banks are exposed. China’s economy faces downside risks from its property downturn and strict COVID curbs,” Tan warned. “[However] we believe general provision buffers built up during the pandemic offset downside risks to asset quality, and the overall financial impact should be manageable.” On the other end of the spectrum, Sri Lanka’s banks face a tough 2023. S&P named banks in Sri Lanka as having the highest financial profile vulnerability in its metrics. “The operating environment remains challenging for the lenders following the sovereign’s default on its foreign currency obligations in May 2022,” S&P reported.
APAC banking industry outlook by market
Hong Kong: “Stronger net interest margins should help offset the weakness in fee income from wealth management and bancassurance activity. Credit cost is expected to decline as incremental provisions from the China property sector stay low.” (Shinoy Varghese, S&P primary credit analyst, Hong Kong) India: “We project that the banking sector’s weak loans will decline to 4.5%-5% of gross loans by March 31, 2024. Likewise, we forecast the credit costs to normalise to 1.2% for fiscal 2023 and stabilise at about 1.1%-1.2% for the next couple of years. This makes credit costs comparable to those of other emerging markets and India’s 15-year average. The small and midsize enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited.” (Deepali V Seth Chhabria, S&P primary credit analyst, Mumbai) Indonesia: “Indonesia banks are enjoying a revival of loan growth and profitability. Elevated credit costs seen during COVID are receding. We expect credit losses for Indonesian banks to gradually decline to 200 basis points (bps) in 2022 and 180 bps in 2023, from their peak of more than 270 bps in 2020. We also expect the sector’s profitability to improve to the pre-pandemic 2.4% in 2023. Higher interest margins and lower credit costs will support this. The banking system will likely rank among the most profitable in the region by a considerable margin.” (Ivan Tan, S&P primary credit analyst, Singapore)
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Taiwan: “We expect higher credit costs as loan moratoriums end but asset quality is satisfactory. [Banks’] solid capitalisation will provide sufficient cushion to absorb higher credit losses. We anticipate further rate rises in the U.S. and Taiwan in 2023, which will continue to lift banks’ net interest margin.” (Yuhan Lan, S&P primary credit analyst, Taipei) ASIAN BANKING & FINANCE | Q1 2023 19
