AsiaPac banks to face higher credit costs in 2012

High loan growth and moderate credit costs is now a thing of the past.

According to a release, the Asia-Pacific banking industry faces a turning point in 2012 following three years of stable performance, according to an article published by Standard & Poor's Ratings Services. We believe that the high loan growth and moderate credit costs the sector has enjoyed could become a thing of the past. Instead, Europe's debt crisis, lower regional economic growth, and contraction in some property markets could impair loan quality and push credit costs higher.

"In our view, slower economic growth is likely to impede credit growth and fee-based activities for banks, and this, in turn, could weaken profitability," said Standard & Poor's credit analyst Naoko Nemoto. "Instability in the global financial markets could also hurt Asia-Pacific banks that rely on wholesale funding, and higher funding costs would squeeze net interest margins."

Yet despite these potential hurdles, we expect adequate capitalization, strong systemwide liquidity, and low levels of nonperforming loans (NPLs) to help Asia-Pacific banks navigate a difficult 2012. Currently, a majority of our bank ratings fall into the single 'A' category or higher, and 80% of our outlooks on Asia-Pacific bank group ratings are stable, which reflects our view that most rated banks will be able to withstand the pressure.

Under our base-case scenario, we assume that the global economy will slow but avoid a severe recession (for more details, please see "Growing Global Risks Eclipse Asia-Pacific Economic Growth in 2012," published Dec. 16, 2011). If the Asia-Pacific economy faces a sharp and prolonged downturn due to a global recession, causing a surge in credit costs and capital deterioration, we could consider negative rating actions. A hard landing in China, with weaker economic growth than our base-case scenario of 7.7%-8.0% GDP growth, would have significant knock-on effects on growth in the Asia-Pacific region. However, this downside scenario is unlikely in our current view. (Standard &Poor's has published industry reports on the banking sectors of 14 countries in the Asia-Pacific region.