Asian economic recovery to continue in 2010: Fitch

Expected gowth of China economy, followed by India at seven per cent. (AFP)

In sharp contrast with the prevailing gloom at the start of 2009, the recovery for Asian economies and banks was surprisingly rapid, resulting in much better than expected results for 2009 and for most of the region's banks, generally positive trends going into 2010, Fitch Ratings said in a study.

The expected sharp deterioration in bank asset quality arising from the global recession did not materialise as the rebound in Asian economies, after the dismal Q1 2009, limited the deterioration in asset quality to moderate and manageable levels. As a result, Asian banks remained generally resilient.

Government guarantees for banks helped maintain depositor confidence and bank fundraising efforts. However, offers of government capital were taken up only by some Korean banks, and reluctantly, as evidence grew that they remained adequately, if not strongly, capitalised, and the returning confidence of foreign bank counterparties and investors restored their access to foreign currency funding.

The economic recovery in Asia that gathered pace in H2 2009 is continuing into 2010, and Fitch forecasts moderately robust or stronger growth for most Asian economies.

China is expected to lead with growth of close to nine per cent, followed by India at seven per cent.

Growth forecasts are clustered around the four to five per cent range for Malaysia, Korea, Indonesia, Hong Kong, Singapore and Taiwan. Thailand and the Philippines are forecast to lag slightly on three per cent.

Economic growth of this order suggests that banks will be enjoying an expansionary environment. Indeed, concerns are growing that credit is increasing too rapidly to some sectors, especially residential real estate. Fitch viewed these concerns as premature for most countries, but recognises that higher interest rates may be needed in 2010, which will hurt earnings in some countries eg India. But higher rates would actually be beneficial to some banks, as they would have some opportunity to widen spreads that were squeezed by the decline rates to absolutely low levels in 2009.

Regulatory changes are not a key concern for most Asian banks in 2010, in contrast to those in developed markets, in part because they have not required expensive taxpayer?funded bailouts, helped by their generally strong capital ratios and liquidity – two key areas of focus of global bank regulators. Implementation in Asia of the 'volcker rule' removing high risk investment and proprietary trading from banks would have minimal impact as few banks have moved far away from a traditional and relatively simple banking model focused on customer business.

Despite talk of 'decoupling' over recent years, the fortunes of Asian economies and hence banking systems remain substantially affected by growth in the US and Europe, so the possibility of economic weakness there is a major risk factor for 2010. The much debated importance of China as a source of demand is clearly growing, so the question of whether China can head of any incipient bubbles and maintain strong but sustainable growth is an important factor for the rest of Asia. It is also a crucial factor for China's own banks, for many of which profit and capital cushions are thin relative to their large and rapidly growing risks, which in Fitch's view may not be fully captured in their balance sheets and reported capital ratios.

In China, the dominant theme continues to be the rapid pace of credit growth, which, after slowing in H2 2009, picked up considerably again in the first few weeks of 2010. Regulators are monitoring credit trends bank by bank on a weekly basis, and by mid-January had already requested that some banks close the lending spigots for the rest of the month. This is the first time regulators have been this stringent this early in the year, which underscores just how intent the government is that loan growth not get out of hand as it did in H1 2009.

Chinese officials have called on banks to distribute lending more evenly throughout the year, and have identified a soft target of Y7.5trn in new CNY loans in 2010, or 18.8 per cent growth yoy. These targets are often breached, and Fitch's baseline estimate is for Y8trn or more, or 20 per cent growth year on year.

Fitch expected the financial performance of Chinese banks to continue to hold up well in 2010 as net interest margin rebounds amid tightened credit policy and as banks raise additional core and supplementary capital to compensate for last year's erosion.

Over the short term, the non performing loan (NPL) ratios of Chinese banks are likely to be kept in check by the denominator effect of strong loan growth – the NPL ratio for the banking system fell to 1.6 per cent at end 2009 – and as some new loans are used to roll over delinquent obligations.

 

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