The continued slowdown and rebalancing in China, high corporate and household leverage in several economies, and looming US rate rises create a potentially challenging risk environment for emerging Asia-Pacific financial systems over the medium term, says Fitch Ratings.
Risk-channels for the region's banking systems are disparate. Growing exposure to China in key international centres such as Hong Kong and Singapore, as well as Macao and Taiwan, is a potentially significant risk factor in these markets as mainland growth slows and the economy rebalances away from capital investment growth.
China concentration is highest in Hong Kong, where it accounts for 32% of system-wide assets and where individual banks' exposure - especially for mainland subsidiary banks - can reach up to 9x their Fitch Core Capital. In Singapore, Fitch estimates that exposures total about 12% of sector assets, while in Taiwan the figure is 8%. For now, these Chinese exposures have been factored into ratings, however the future pace of growth relative to capital buffers will remain key rating drivers. This would lead to a higher probability of negative rating action if China exposures raise asset concentration levels and/or become riskier without a commensurate strengthening of capital buffers.
Second-order exposures related to the China rebalancing are also notable in the region, as the slowing economy feeds through to sustained lower commodity prices and reduced growth in trade and cross-border investment. Countries with large commodity export components such as Indonesia and Malaysia have already seen economic growth slow and currencies come under pressure. In Malaysia, the combination of slowing growth with high household debt could result in pockets of stress in the more vulnerable segments of the economy as the credit cycle turns.
Thailand, which is a net commodity importer, is less exposed to a China slowdown. But the country is facing a growth slowdown and a high household debt ratio. As such, Thailand's financial system is vulnerable if the economic environment deteriorates further.
Rising US interest rates adds to the risk environment, a scenario which Fitch expects by end-2015. Currency pressures have risen, especially as monetary authorities adjust policy to respond to weaker growth. Should foreign-currency exposures intensify rapidly and system buffers fall concurrently, it would elevate risks and raise the likelihood of negative rating action.
That said, it is notable that Asian banking sectors are relatively well-positioned relative to other emerging market regions. Exposure to foreign-currency borrowings remains relatively low, as are loan/deposit ratios, signaling limited reliance on foreign and wholesale funding. Relatively higher foreign-exchange reserve accumulation in Asia also gives a level of protection to the region.
These topics will be among the focal points of discussion at the Fitch Global Banking Conference to be held in Hong Kong and Singapore on 17 June and 19 June, respectively.
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