Fitch Ratings believes vulnerability to adverse developments in US commercial real estate (CRE) is generally low among its rated banks in APAC, though there may be a small number of banks across the region where the risk of losses is greater.
Commercial property loans, including both domestic and overseas lending, average above 10% of system assets across developed-market APAC banking systems, with Singapore’s major banks at above 15%. Exposure tends to be low in most of the region’s emerging markets, but is in the high single-digits in the Philippines and Malaysia for major banks.
The potential impact of exposure to troubled US CRE segments, particularly office and retail properties, was highlighted after Japan’s Aozora Bank reported a loss for 4Q23, due partly to bad loans associated with US real-estate lending. Fitch believes that its rated banks in APAC generally have much lower levels of exposure to US CRE than smaller US banks, whose credit profiles can be more vulnerable to the segment’s troubles. APAC banks’ exposure to US property, including CRE, is generally less than 2% of lending where publicly disclosed, though many banks do not break out the data.
Shanghai Commercial Bank Limited’s (A-/Stable/a-) higher exposure to the US market accounted for 29% of loans (12% of assets) in June 2023, but the bank does not disclose what share of this is CRE-related. US exposures accounted for around 5% of loans (2.7% of assets) at June 2023 at China CITIC Bank International Limited (BBB+/Stable/bbb+), but similarly this is not all CRE. We also believe that Macquarie Group Limited (A/Stable/a) may have US exposure above the average for Fitch-rated banks in APAC, but this would be mostly in the less-troubled power and infrastructure segments through its asset management business. Some APAC financial institutions, including banks not rated by Fitch, potentially have US CRE exposure levels higher than the average for Fitch-rated APAC banks.
Most APAC banking systems are experiencing relatively benign asset-quality conditions, so any impairments related to CRE may attract additional investor attention. In general, Fitch expects local CRE market developments to have a greater impact than exposure to US CRE. The ratings agency recently stated that local CRE risks would add to asset quality headwinds facing Hong Kong banks, for example, and Korea’s Woori Financial Group, the parent of Woori Bank (A/Stable/a-), made KRW525 billion (around USD396 million) of provisions in 4Q23, partly relating to expectations around Korean real-estate asset quality.
For the small number of outliers in its APAC bank portfolio where US CRE exposures are significantly above average, the lending is generally to select clientele that have low loan-to-value (LTV) ratios, generally around (if not below) 50%. This ameliorates potential vulnerability to US CRE asset price declines. Moreover, banks may be lending against US CRE segments other than office properties – though Fitch also expects weakening across retail, hotel, multifamily and industrial properties through 2025.
The levels of exposure contribute to its view that CRE lending alone is unlikely to become a source of systemic risk for banks in APAC, considering the low LTV ratios for property lending (particularly in developed markets) and the strength of corporate borrowers. However, increased asset-quality problems in CRE lending could still weigh on rated banks’ credit profiles, especially in conjunction with the impact of recent high interest rates on other segments, such as residential mortgage borrowing, SME loans and unsecured lending. Risks to specific bank ratings would depend partly on the adequacy of loss-absorption buffers (including LTV ratios and existing provisions), as well as prospects for extraordinary support from parent entities or the sovereign, if needed
