Fitch cautions Asia-Pacific banks on weak operating environment

Fitch Ratings says a weaker operating environment in Asia Pacific may lead to rating pressure on banks in China and India.

According to Fitch, a high proportion of Indian bank ratings are on Negative Outlook, reflecting that of the sovereign ratings. For China and India pressure is also building on Viability Ratings. The consequences of China's rampant credit growth on bank credit quality and solvency are now becoming evident. India's more protracted slowdown means the credit fundamentals of state-owned banks are also under pressure, after a build-up of single-name and sector concentrations and rising non-performing loans.

The report, "Asia-Pacific Banks: Growing Caution", states that more generally Asia has seen rapidly rising leverage which, together with greater exposure to China, will constrain upward rating momentum in Asia. Hong Kong's strong economic ties with China, and its banking system's growing exposure to the mainland, mean its banks are also vulnerable to deterioration in the Chinese economy.

Banks in weaker-rated Mongolia, Sri Lanka and Vietnam are more sensitive to a slowdown in economic growth due to risks attached to recent rapid credit growth, the overhang of previous excessive credit growth, or other structural weaknesses in these lower-income economies.

Singaporean and Australian banks have demonstrated resilience through the global crisis. Yet Australian banks, despite progress in reducing reliance on international capital market funding, remain sensitive to external shocks. This is because there continues to be this funding reliance and also because of the economy's exposure to China, particularly resources. Key areas to monitor will be corporates that benefited from the resource boom, and employment in light of high household leverage.

For Japan, mega-banks have been encouraged by weak prospects at home, and retrenchment by European banks in Asia, to use their strong liquidity for accelerated expansion in Asia. This strategy is not without its risks, given the less-developed operating environments in the rest of Asia. These are all areas to monitor, together with asset quality pressures in Japan's domestic SME market.