Fitch Ratings reports that the current monetary policy tightening cycle will generally support bank credit profiles in Asia, to the extent that higher interest rates lift net interest margins (NIMs).
Asset-quality exposures appear well contained, but there could still be risks after a long period of supportive monetary policy that has contributed to rising leverage and asset prices in many markets.
The sharpest rate increases are likely to be in Hong Kong and Singapore, where exchange-rate regimes link local interest rates to the US Fed funds rate. Upsides for NIM in these two markets are likely to be the highest in the region. We also expect significant tightening in Australia, New Zealand, and India, as policymakers respond to above-target inflation. However, rates are unlikely to change much in China, Japan, or Vietnam
On the impact of rising interest rates, the rating agency does not expect significant deterioration in asset quality in any APAC banking sector, 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. Securities portfolio losses should also be manageable, but banks in Hong Kong, India, Indonesia, Malaysia, and Taiwan have the largest securities portfolios and are the most sensitive to yields.
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. More aggressive tightening would add to asset-quality risks without necessarily continuing to deliver revenue benefits for banks. Asset-quality deterioration could eventually outweigh revenue upside, particularly if economies were tipped toward recession.