Fitch Ratings expects greater divergence in the performance of banking sectors in Asia Pacific (APAC) in 2024, with five countries set to report broadly improving results and three to see deterioration. These outlooks stand in contrast to those leading into 2023, when the ratings agency projected a broadly stable performance for the vast majority of APAC banking sectors, with only our outlook on Sri Lanka judged to be deteriorating at that time.
The difference in outlooks is particularly marked between banking sectors in APAC emerging markets (EM) and developed markets (DM). All five of the countries where Fitch expects an improving performance are EMs: India, Indonesia, Sri Lanka, Thailand, and Vietnam. By contrast, the agency expects a deteriorating performance in the DMs of Australia and New Zealand, with China as the only EM where the outlook is deteriorating.
Banking sector outlooks among many APAC EMs are generally supported by its economic growth projections Fitch said. Growth should buoy loan demand and limit the potential adverse effects on asset quality from interest rates, which the agency believes have largely peaked across the region. The markets where (relatively short-term) sector outlooks are improving align well with the agency’s view on (longer-term) bank operating environment scores, which are positive in Indonesia and Vietnam, while the score on India was raised in 2023.
China marks an important exception among APAC EMs, with rising system leverage, prolonged property stress, and a shifting policy environment posing downside risks to its banks’ performance. Fitch expects these risks to weigh on Chinese banks’ growth and profitability in 2024, though it expects the largest banks to be less affected than the rest of the system.
A number of risks will be worth watching next year in APAC EMs, despite views that the overall outlooks are mostly improving or stable. The appropriateness of capital buffers relative to risk appetite could become relevant for some banks’ intrinsic credit profiles – as robust growth, the prospect of rate cuts, and acute competition could lead some to take on more risk to boost earnings. Indonesia stands out as having the highest buffers, both in capital and profitability. Thin capital levels could constrain loan growth for some banks, for example in China, India (particularly state banks) and Vietnam. There is also some risk that the winding-down of loan forbearance and restructuring schemes in markets like China, India, Indonesia, Thailand and Vietnam leads to a faster rise in non-performing loans than we currently assume.
The peaking of the regional interest-rate cycle will tend to affect APAC DM banking sectors more than EMs. Overall loan growth should remain positive, and generally higher than in 2023, for most DMs, but Australia and Japan will be exceptions, with loan growth weaker than the previous year by around 1pp. Net interest margins (NIMs) and non-performing loan (NPL) ratios will come under pressure, but Fitch expects the degree of weakening will generally be modest, with asset-quality deterioration being most marked in Australia and New Zealand.
However, the impact could be more severe than currently projected if global and regional interest rates move higher or remain high for longer than expected it said. Stress scenarios beyond the baseline assumptions could pose challenges for regional housing markets in APAC, which outside of China and Hong Kong appear to be stabilising or recovering. If growth in China is significantly weaker than forecast, that could also pose risks for banking sectors that have exposure to China, either directly – as in Hong Kong, Singapore and Taiwan – or indirectly through trade linkages.
