Fitch Ratings: Asia-Pacific Banks' Overseas Growth Faces Challenges

(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): What Investors Want to Know: APAC Investment-Grade Banks https://www.fitchratings.com/site/re/10050314 Fitch Ratings-Hong Kong/Sydney/Singapore-November 08: Banks across most of the Asia-Pacific's developed economies have expanded into the region's emerging markets over the past decade to boost profitability and offset low domestic returns. This exposure is potentially higher risk than the banks' domestic business and could be tested as trade tensions, global monetary tightening and China's economic slowdown weigh on the operating environment in many of these markets, some of which are vulnerable to volatility and asset quality weakness, says Fitch Ratings in a report published today. The pace of future overseas expansion will form part of our assessment of banks' risk appetite as the regional environment turns less benign. Australia's major banks have been notable for bucking the trend of regional expansion in recent years, simplifying their businesses and footprints to put a stronger focus on their core banking operations in Australia and New Zealand - or are at least in the process of doing so. Rising global interest rates are, however, pushing up the banks' funding costs, and they could be vulnerable to a large, sustained shift in global capital flows, as wholesale funding makes up 30%-40% of their total funding profiles. It could be difficult for the major banks to pass on much of the increase in funding costs to borrowers amid official inquiries into the industry, including a Royal Commission into alleged misconduct by the financial services industry. We therefore expect net interest margins and profitability to come under pressure. Japan's mega banks' expansion in the Asia-Pacific's emerging markets and the US has tempered the drag from low growth, intense competition and low interest rates in the domestic market. We view their risk appetite as having risen incrementally as they have pursued higher-margin lending, but this has until now been accompanied by an increase in loss-absorption buffers. Overseas growth has slowed recently due to the banks' need to conserve capital and fewer available opportunities (at acceptable values), but could pick up again as the banks seek to strengthen their fee-generating businesses. Korea's larger banks are expanding abroad, particularly in emerging Asia, and aspire to have their overseas operations account for more than 20% of assets and earnings over the medium to long term. However, in the near term, we believe they will focus mainly on growing their domestic exposure to SMEs and households. We see the major banks' appetite for risk as lower than other Korean financial institutions, such as finance companies and savings banks, while tighter regulation will also serve to contain risk. Hong Kong banks' strong expansion in mainland China prompted Fitch to lower the operating environment assessment to 'a/Stable' in 2018. Mainland China exposure (MCE) exceeds 25% of broad assets and is likely to rise further, with growth increasingly driven by lending to private-sector companies, individuals and lower credit-quality financial institutions as banks seek to support margins and expand their product offerings to new segments. Fitch views the banks' MCE as both higher and riskier than their domestic property exposure. However, Hong Kong banks' generally robust loss-absorption buffers, high liquidity and the strength of local regulations help to guard against risks. The major Singaporean banks' exposure to south-east Asia and greater China accounts for around 40% of their consolidated loans, and is likely to rise further as the banks are driven to seek growth overseas. The major banks' ratings assume their expansion will not be excessive and they will not materially loosen their underwriting standards. Rising exposure to markets rated lower than Singapore could have negative implications for the banks' blended operating environment and, in turn, Viability Ratings (VR). However, the banks' VRs take into account strengths in capitalisation and domestic liquidity, which may offset increases in risk appetite. For more information, see the full report "What Investors Want to Know: APAC Investment-Grade Banks", available at www.fitchratings.com or by clicking the link in this commentary. Contact: Jonathan Cornish Managing Director Financial Institutions +852 2263 9901 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central Hong Kong Bert Jansen Director Financial Institutions +61 2 8256 0345 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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