Related Fitch Ratings Content: Credit Costs to Remain Elevated for APAC Banks in 2021
Fitch Ratings-Singapore/Hong Kong-29 September 2020: Provisioning levels will remain elevated across Asia-Pacific (APAC) banking sectors in 2H20 and 2021, says Fitch Ratings. The lingering effects of the economic downturn prompted by the coronavirus pandemic will strain borrowers’ repayment capacity in many regional markets, particularly as authorities withdraw support and forbearance measures.
Annualised credit costs across 79 of the largest Fitch-rated banks in APAC increased to an average of 1.26% of gross loans in 1H20, from 0.84% in 2019. The rise was more marked in emerging markets. This may reflect the magnitude of policy responses and relative impact of the pandemic economic shock in the region’s developed markets, as well as banks’ superior risk management in these jurisdictions. However, it could also signal under-provisioning in some cases.
Indian banks reported a drop in 1H20 credit costs relative to 2019, making the country a notable exception among APAC markets. India’s provisioning seems at odds with the scale of its economic contraction, which is likely to be among the steepest in the region. This may reflect India’s incurred-loss accounting approach and banks’ limited capital buffers to absorb credit losses, as well as extensive forbearance. However, we also believe that problem loans are likely being under-reported and under-provided for.
Widespread use of forbearance makes it harder to assess which banks are being more or less conservative in their response to asset-quality pressure. Profitability and asset-quality metrics are likely to be distorted should a bank’s reporting of expected credit losses not factor in the full impact from the pandemic shock. Fitch makes forward-looking assumptions to assess ratings, based on relative exposures, and may adjust implied scores for asset quality, profitability and capitalisation if it believes that headline reported ratios do not fully reflect a bank’s true financial position.
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