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Research Report

29/07/2020 16:48

Recession risks weigh on APAC banking prospects - S&P

[ET Net News Agency, 29 July 2020] Recession risks threaten the prospects for
Asia-Pacific financial institutions as the effects of the COVID-19 pandemic continue to
weigh on bank credit quality in the region, according to "Asia-Pacific Financial
Institutions Monitor 3Q2020: Recession Risks Weigh On Banking Prospects," a report
published today by S&P Global Ratings.
The credit rating agency's rating outlook bias for financial institutions in the region
remains firmly negative. Negative outlooks (about 18% of ratings) significantly outnumber
positive outlooks (about 2% of ratings). Remaining ratings on positive outlook represent a
diminishing pool of credits influenced by idiosyncratic factors rather than systemic
"Our macroeconomic forecasts are the principal driver of our view of the outlook for
Asia-Pacific financial institution credit," said Ryoji Yoshizawa, a credit analyst at S&P.
"We expect the Asia-Pacific economy to contract 1.3% in 2020, and then rebound to 6.9%
growth in 2021. This contrasts sharply with our prior assumption, set before the outbreak,
of 4.7% growth in 2020, and 4.8% growth in 2021," he added.
While S&P expects GDP trends to revert to pre-COVID levels by the end of 2023, the
agency believes the outbreak will have permanently reduced the region's economy by 2%-3%.
S&P sees looming risk of a "balance sheet recession" weighing on Asia-Pacific's economic
growth That said, it expects the hit to the Asia-Pacific economy in 2020 to be less severe
than the eurozone (-7.8%) and the U.S. (-5.0%).
S&P currently expects that credit metrics may not recover to 2019 levels until 2023. In
addition, the low-interest rate environment does not bode well for bank profitability. For
India and Indonesia, the path to recovery from the pandemic may be more painful than for
some other Asia-Pacific banking jurisdictions. India is seeing a very sharp economic
contraction and had high nonperforming loans leading into COVID-19. Indonesian firms,
meanwhile, are burdened by a slow economy, weak commodity prices, and high foreign
exchange debt, which may spill over to the country's banks. (KL)

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