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Interest rates buoy APAC banks’ margins
TECH RISKS INTENSIFY AS BANKS RAMP UP DIGITISATION EFFORTS
BANKING TECHNOLOGY
The increased digitalisation efforts of Asia Pacific banks is giving rise to technology-related operational risks.
Several APAC banks recently suffered technology-related service disruptions in the past year. Notably, Japan’s Mizuho Bank saw a widespread glitch that caused a breakdown in its ATM network in 2021, and disruptions to its corporate banking services in January 2022.
Singapore’s DBS bank also suffered a major IT outage in November 2021 that saw customers unable to access their mobile and PayNow accounts; whilst OCBC customers fell victim to an SMS phishing scam that pushed the local financial regulator to enact new guidelines to bolster digital banks’ cybersecurity.
In a report, Fitch Ratings believes that tech risks will intensify for banks as stakeholders–including regulators–demand higher standards for efficient, reliable and secure services.
“Incidents of technological failure, whether brought about by internal system lapses or external cyberattacks, impose not only direct monetary losses but may also have significant reputational and regulatory consequences for banks,” the ratings agency wrote.
Severe impact
The impact of technological risks on banks’ credit ratings are likely to be more severe if they recur or persist over a protracted period, or if they reflect broader weaknesses in their non-financial risk management, the ratings agency added.
Fitch also warned that these risks may even influence its assessment and lead to downward pressure in banks’ credit profiles. This is especially true for banks with limited rating headroom to withstand additional risks and weaknesses.
Asset-quality deterioration could eventually outweigh revenue upside
Interest rates buoy APAC banks’ margins
RETAIL BANKING
Higher interest rates driven by the current monetary policy tightening cycle are expected to lift Asia-Pacific banks’ net interest margins (NIM). However, risks will intensify at the same time depending on the increase in rate and rising inflation.
“Should US rate hikes be larger than we expect, this could trigger faster or greater tightening in some APAC markets, as could domestic inflation that proves higher or more persistent than we forecast,” Fitch Ratings said in a special report.
Currently, a significant deterioration in asset quality in any APAC banking sector is not expected, though there may be pockets of vulnerability.
“This partly reflects our expectations for relatively moderate tightening across APAC, where inflation pressure is generally more subdued than in other regions,” Fitch noted, adding that securities portfolio losses should be manageable. “More aggressive tightening would also add to assetquality risks, with no more revenue benefits for banks.”
Rate increases are sighted to be sharpest in Hong Kong and Singapore, where exchange-rate regimes link local interest rates to the US Fed funds rate. Banks in these two markets are expected to enjoy the highest possibility of net interest margins upsides.
Significant monetary policy tightening cycle is also expected in Australia, New Zealand and India, whilst rates are unlikely to change much in China, Japan or Vietnam.
“Asset-quality deterioration could eventually outweigh revenue upside, particularly if economies were tipped toward recession,” the Fitch Ratings report warned.
Credit losses rise
The probable benefits of interest rates rising on banks’ margins would not be enough to offset losses over the next 18 months.
APAC banks’ credit losses are expected to total US$865m in the next 18 months ending in 2023, said S&P Global Ratings credit analyst Gavin Gunning. In 2022 alone, credit losses are forecasted to hit US$425b, with another US$440b in losses in 2023.
Gunning noted that economic growth prospects are weaker all around, with inflation rising. Corporate and household leverage is also high, and stress in the property sector is intensifying.
China in particular face heightened risk due to its slowing growth. On the upside, the mortgage strikes reported in the country pose a limited direct threat to local banks, as they comprise just 1.3% of banks’ loan book in a downside scenario.
Outside of China, Asia-Pacific banks’ balance sheets are overall in good enough shape to buffer headwinds, Gunning said.
“Bank capital has strengthened materially since the global financial crisis, and asset quality is sound,” the S&P Global expert added.
