Agressive regional expansion by banks fraught with risks

S&P warns banks in Singapore, Hong Kong, and Malaysia from overly agressive expansion that could weaken their credit profiles.

Banks in Singapore, Hong Kong, and Malaysia are likely to continue expanding regionally over the next several years to take advantage of higher yields and the growth potential in emerging markets. However, the inherently higher risks and evolving operating conditions in regional economies are likely to counterbalance the revenue and diversification benefits for these banks. That's according to a report, titled "Regional Expansion By Singapore, Hong Kong, And Malaysian Banks Is A Double-Edged Sword," that Standard & Poor's Ratings Services published today.

"Overly aggressive overseas expansion could weaken the stand-alone credit profiles of individual banks," said Standard & Poor's credit analyst Ivan Tan. "We, however, expect these banks' sound financial profiles, prudent risk management, and potential support from respective governments or parent groups to continue to support the ratings in most cases."

The report notes that increasing linkages among various Asia-Pacific economies and fierce competition in home markets are key factors in the regional expansion of banks in Singapore, Hong Kong, and Malaysia. Standard & Poor's expects loan growth in these countries to moderate amid the economic slowdown in 2012, in contrast to the strong expansion in loan book last year. Interest margins are also likely to remain low, as interest rate hikes are unlikely in 2012.

"Emerging Asian economies such as China, India, Indonesia, and Vietnam offer notably higher growth potential due to their sheer population and lower banking penetration rate," said Standard & Poor's credit analyst Terry Sham. "The net interest margins in some of these countries are also significantly higher than in Singapore, Hong Kong, and Malaysia."

Such regional expansion is, however, fraught with risks. China, India, Indonesia, and Vietnam have lower per capital incomes, higher policy risks, weaker payment cultures, and more legal uncertainties than the home markets of these banks. These could translate into higher credit losses in the case of substantial economic stress.

Standard & Poor's expects most rated banks in Singapore, Hong Kong and Malaysia to further expand in a measured and prudent fashion. Sizable debt funded acquisitions could threaten banks' capitalization. Execution risks and regulatory uncertainties could impose additional challenges on mergers and acquisitions.