JAKARTA (TheInsiderStories) – Moody’s Investors Service says in a new report that the profitability of Asia-Pacific (APAC) banks will deteriorate over the next few years as the coronavirus outbreak accelerates structural changes.
“Lower-for-longer interest rates, rising credit costs and operating expenses, and in some countries aging populations will on weigh on the profitability of APAC banks in coming years, with many of these trends exacerbated by the coronavirus outbreak,” says Rebaca Tan, an analyst from Moody’s .
She continued, “While the region’ banks are all facing a growing need to change their business models to overcome these challenges, laggard institutions are at a greater disadvantage.”
According her, banks’ return on assets already declined in 12 out of 17 APAC banking systems between 2014 and 2019, and is likely to remain weak at least through 2020 – 2021. Among other factors, deflationary pressure from a reduction in aggregate demand and low oil prices will keep interest rates low for a prolonged period, leading to declines in interest income and net interest margin compression to levels that can only be partly offset by reductions in funding costs.
Another drag on profitability is likely increases in credit costs as asset quality weakens, while the accelerating shift to digital banking services will push up operating expenses. To reduce their dependence on net interest income from domestic markets, banks will increasingly pursue other revenue sources or expand overseas while continuing with digitization.
However, these options have their own challenges, especially for laggard banks that lack the vision or resources to overhaul their business models. She added, the gap between agile large and laggard banks in their ability to tackle profitability challenges means the former will widen their competitive edge. In the long term, laggard banks that fail to change their business models will become acquisition targets or will have to merge to survive, said Tan.
Earlier, Moody’s rated, the prolonged coronavirus outbreak would hurt Asia Pacific (ex-China) bank profitability and asset quality. It said, the epidemic also will hit the other sectors.
“If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia Pacific through various channels,” says Eugene Tarzimanov.
He adds, “While such effects would mostly stem from macroeconomic consequences that can take many quarters to materialize, some events, such as a decline in commodity prices, could have a rapid knock-on effect on banks.”
The coronavirus outbreak comes at a time when APAC banks are already grappling with slowing economic and credit growth, as well as falling interest rates, which will weaken their profitability and asset quality. In the event of a prolonged outbreak, Moody’s expects that the banks will be affected through travel and tourism, private consumption, supply chains, commodities, property prices, and financial markets.
At the same time, the agency expects that governments and regulators will take measures to support their economies if disruptions from the outbreak worsen, such as fiscal stimulus, monetary policy easing, the removal of some macro-prudential measures, as well as forbearance or direct support to affected industries and borrowers. Such actions would somewhat mitigate the negative impact on banks.
The agency said, as people travel less, economic growth and employment conditions will weaken in jurisdictions that are dependent on foreign travelers. This will hurt banks’ asset quality, in turn driving up credit costs and weakening profitability.
In the private consumption side, the rater sees households will consume less at brick-and-mortar retail outlets, hurting businesses that are dependent on domestic private spending. Banks will face credit losses from exposures to weaker companies.
Then in supply chains part, factory closures in China will disrupt supply chains, particularly in the electronics and automotive sectors. In that event, credit risks for banks will arise from financing for suppliers or subcontractors that are dependent on orders from major technology or auto companies.
In addition on commodities side, weaker demand from China can drive down commodity prices. In that scenario, economic growth in commodity-exporting countries can slow, with the financial health of commodity companies deteriorating, which will pose risks to banks’ asset quality.
While, on property prices side, real estate prices can decline as a result of weaker economic growth and investor confidence, leading to larger losses on mortgages and property exposures.
And in financial markets, prices of financial assets are likely to decline if disruptions from the outbreak persists. This will result in declines in the values of mark-to-market securities held by banks and falls in revenue from financial markets.
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