JAKARTA (TheInsiderStories) – The high corporate leverage across Asia Pasific is posing increasing risk to the region banks, as slower economic growth, rising trade and geopolitical tensions, says Moody’s Investors Service in the latest report. The agency also stressed that Indonesia and India are very vulnerable to the potential decline in the company’ debt repayment ability.
“Our stress test – which assumes a 25 percent decline in EBITDA – shows banks in India and Indonesia are most prone to a deterioration in corporate debt repayment capacity, followed by banks in Singapore, Malaysia and China,” says Rebaca Tan, a Moody’s Assistant Vice President and Analyst.
In Indonesia, the default of the biggest textile company Duniatex Group also impacted negatively to the lenders. Duniatex case began when its subsidiary, PT Delta Dunia Sandang Tekstil (DDST), failed to pay interest of US$13.4 million on July 10, 2019, for a syndicated loan of $260 million. In total, as of March, six units of the Group have total debts of Rp18.79 trillion (US$1.33 billion).
In details, DST have debt Rp2.92 trillion, PT Delta Merlin Dunia Textile (DMDT) worth of Rp5.71 trillion, PT Delta Dunia Textile Rp4.67 trillion, PT Delta Merlin Sandang Textile Rp3.26 trillion, PT Dunia Setia Sandang Asli Textile Rp2.12 trillion, and PT Damaitex worth of Rp97 billion.
The loans came from 20 banks, that provided bilateral loans, three syndicated loans, and bond debt. Three state-owned bank, and several other large banks were involved as Duniatex creditors.
She also rated, the corporate default rates in Asia Pacific have been low so far, helped by low interest rates and favorable financing conditions. However, the intensifying trade and geopolitical tensions are weighing on the global economy and supply chains amid already slowing growth, she adds.
“Moody’s assumed banks in India and Indonesia are most prone to deterioration of corporates’ debt repayment capacity, followed by Singapore, Malaysia and China,” said the analyst.
Total corporate debt across the 13 economies covered by Moody’s report grew only 1 percent year over year in US Dollar terms at the end of 2018, the slowest pace since the global financial crisis. Yet, overall corporate leverage remains high relative to GDP in many of the region’ economies.
Moreover, outstanding debt is heavily concentrated among corporates that hold debt more than four times EBITDA, raising the risk of rising defaults as operating conditions weaken. Somewhat mitigating these risks are the strong buffers kept by most Asia Pacific banks, in the form of both loan loss reserves and capital, to withstand a sharp deterioration in asset quality.
Under Moody’s stress scenario, capital ratios would decline by 1 to 4 percentage points in most economies, leaving banks with sufficient buffers. Among the 13 banking systems, Indian banks are
the most vulnerable.
The local bank’ share price was trapped in the red zone after Moody’s released the report, with PT Bank Negara Indonesia Tbk (IDX: BBNI) recorded the deepest correction.
The state-owned bank‘ share price fell 2.36 percent, PT Bank Rakyat Indonesia Tbk (IDX: BBRI) down 1.44 percent, PT Bank CIMB Niaga Tbk (IDX: BNGA) dropped 0.99 percent, PT Bank Pan Indonesia Tbk (IDX: PNBN) was corrected 0.77 percent, PT Bank Mandiri Tbk (IDX: BMRI) and PT Bank Central Asia Tbk (IDX: BBCA) lowered 0.36 percent and 0.25 percent, respectively.
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