APAC banks grapple with growing property risks

Rising property loans and household indebtedness may pose problems for banks’ balance sheets soon.

Higher levels of property exposure are raising the associated risks for Asia Pacific’s banking sector with Australian and New Zealand banks exhibiting the highest residential property risk, according to credit rating agency Fitch.

Risks will remain high in the two markets as household debt grows due to rising home prices, driving future growth prospects for property loans.

Meanwhile, Korean banks, who similarly grapple with high leverage levels, can look to Hong Kong, Thailand, and Malaysia where household leverage is high but contained by various efforts from regulatory authorities and cooling policies.

“Consumers in developed markets with high household credit relative to income are increasingly susceptible to a rise in unemployment and interest rates, in combination with weak wage growth,” Fitch noted, adding that it can hurt the asset quality of banks.

However, Hong Kong banks aren’t out of the woods yet for they contain high property-related risk amidst a boom in both commercial and residential lending. Fitch believes that the high risk associated with Hong Kong banks stems from the economy’s strong relationship with the property sector and to the Mainland. “A significant and fast price decline in Hong Kong could hurt sentiment and expose imbalances as high and rising prices have boosted private-sector wealth, banks’ reserves and collateral valuations.”

“Any fallout from recent years’ excessive growth, incrementally higher risk-taking and relaxed pricing to offset competitive pressures is unlikely to be significant in 2018, given the prevailing economic conditions across the region,” Fitch said. “However, higher risk appetite increases the prospects of negative ratings action in the medium term.”