Banks www.fitchratings.com 31 January 2012 Asia-Pacific 2012 Outlook: Asia-Pacific Banks Broadly Stable; Downside Risks Exist Outlook Report Rating Outlook Broadly Stable: Asia-Pacific (APAC) banks‟ ratings have generally stable outlooks, reflecting Fitch Ratings‟ view of their ability at their existing rating levels to weather the weaker global economy, or the ability and willingness of the respective sovereigns to provide support. Key elements to this rating outlook include the ability to absorb higher credit losses as economic activity slows, as well as the strength of funding structures. Economic Headwinds: Against the backdrop of the global environment, Fitch expects that slower APAC GDP growth will help in most cases to contain inflation and the risk of an asset bubble. More accommodative policy actions are expected to support economic activity – which the agency expects to remain reasonably healthy by global standards. China/Europe Downside Risks: Fitch remains cautious on Chinese banks. Funding and liquidity pressures are growing, as banks balance rising forbearance/asset-quality burdens with pressure to lend in support of economic growth. This is adding downward pressure on Viability Ratings (VRs) within China, and could also have an impact on the VRs of banks based in regional centres where exposure to China has grown – such as Hong Kong and Singapore. Downside risk is also heightened by potential economic contagion from Europe and/or structural economic deterioration in China. Higher NPLs, but Manageable: NPL ratios across the region are expected to rise in 2012, but the trend is not unexpected since most at near-cyclical-lows. Countries that may surprise on the upside – should conditions deteriorate further – are China, India and Vietnam. Strong Loss-Absorption Capacity: Notwithstanding some downward pressure on earnings, pre-provision profit should remain strong – and therefore adequate to absorbing the higher expected credit impairment charges. Thin profitability, however, remains a feature of the Japanese and Taiwanese banking sectors. The prospect of slower credit growth and adequate profitability should mean that capital adequacy is unlikely to be under threat for most banks. Markets where capital pressures do exist are in China, Vietnam, Mongolia and India. With regard to India, the government is expected to play a key role in providing injections of core equity. Funding, a Strength: Except for a few APAC markets, Fitch considers bank funding structures a strength – with healthy loan/deposit indicators, given the largely deposit-funded balance sheets. More wholesale-funded markets such as South Korea and Australia have been bolstering liquidity. That said, the Rating Watch Negative (RWN) for the four major Australian banks largely reflects Fitch‟s view that despite significant improvement, these banks continue to have a weaker funding profile than other global peers of a similar high rating level. What Could Change the Outlook Significant Economic Slowdown: Evidence of a structural – as opposed to cyclical – slowing of China‟s economy and/or contagion from Europe, would have wider negative economic implications for APAC. This, together with the impact on sensitive property markets, would be a potential negative rating trigger. Figure 1 0 20 40 60 80 100 Positive Outlook/ Watch Stable Outlook Negative Outlook/ Watch Developed market Asia/Australasia Emerging market Asia Asia-Pacific Banks: Rating Outlooks/Watches (%) Source: Fitch Rating Outlook STABLE China, Hong Kong, India, Indonesia, Japan, Malaysia, Mongolia, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Vietnam NEGATIVE Australia, New Zealand Related Research Other Outlooks www.fitchratings.com/outlooks Analysts Mark Young (Head of Asia-Pacific Banks) +65 6796 7229 [email protected]Ambreesh Srivastava (South and South-East Asia) +65 6796 7218 [email protected]John Miles (Australia and New Zealand) +612 8256 0344 [email protected]Jonathan Cornish (North Asia) +852 2263 9901 [email protected]
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Broadly Stable: Asia-Pacific (APAC) banks‟ ratings have generally stable outlooks, reflecting
Fitch Ratings‟ view of their ability at their existing rating levels to weather the weaker global
economy, or the ability and willingness of the respective sovereigns to provide support. Key
elements to this rating outlook include the ability to absorb higher credit losses as economic
activity slows, as well as the strength of funding structures.
Economic Headwinds: Against the backdrop of the global environment, Fitch expects that
slower APAC GDP growth will help in most cases to contain inflation and the risk of an asset
bubble. More accommodative policy actions are expected to support economic activity – which
the agency expects to remain reasonably healthy by global standards.
China/Europe Downside Risks: Fitch remains cautious on Chinese banks. Funding and
liquidity pressures are growing, as banks balance rising forbearance/asset-quality burdens with
pressure to lend in support of economic growth. This is adding downward pressure on Viability
Ratings (VRs) within China, and could also have an impact on the VRs of banks based in
regional centres where exposure to China has grown – such as Hong Kong and Singapore.
Downside risk is also heightened by potential economic contagion from Europe and/or
structural economic deterioration in China.
Higher NPLs, but Manageable: NPL ratios across the region are expected to rise in 2012, but
the trend is not unexpected since most at near-cyclical-lows. Countries that may surprise on
the upside – should conditions deteriorate further – are China, India and Vietnam.
Strong Loss-Absorption Capacity: Notwithstanding some downward pressure on earnings,
pre-provision profit should remain strong – and therefore adequate to absorbing the higher
expected credit impairment charges. Thin profitability, however, remains a feature of the
Japanese and Taiwanese banking sectors.
The prospect of slower credit growth and adequate profitability should mean that capital
adequacy is unlikely to be under threat for most banks. Markets where capital pressures do
exist are in China, Vietnam, Mongolia and India. With regard to India, the government is
expected to play a key role in providing injections of core equity.
Funding, a Strength: Except for a few APAC markets, Fitch considers bank funding structures
a strength – with healthy loan/deposit indicators, given the largely deposit-funded balance
sheets. More wholesale-funded markets such as South Korea and Australia have been
bolstering liquidity. That said, the Rating Watch Negative (RWN) for the four major Australian
banks largely reflects Fitch‟s view that despite significant improvement, these banks continue to
have a weaker funding profile than other global peers of a similar high rating level.
What Could Change the Outlook
Significant Economic Slowdown: Evidence of a structural – as opposed to cyclical – slowing
of China‟s economy and/or contagion from Europe, would have wider negative economic
implications for APAC. This, together with the impact on sensitive property markets, would be a
potential negative rating trigger.
Figure 1
020406080
100
Positive
Outlook/
Watch
Stable
Outlook
Negative
Outlook/
Watch
Developed market Asia/Australasia
Emerging market Asia
Asia-Pacific Banks: Rating
Outlooks/Watches
(%)
Source: Fitch
Rating Outlook
SS TT AA BB LL EE China, Hong Kong, India, Indonesia, Japan, Malaysia, Mongolia, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Vietnam
NN EE GG AA TT II VV EE Australia, New Zealand
Related Research
Other Outlooks www.fitchratings.com/outlooks
Analysts
Mark Young (Head of Asia-Pacific Banks) +65 6796 7229 [email protected] Ambreesh Srivastava (South and South-East Asia) +65 6796 7218 [email protected] John Miles (Australia and New Zealand) +612 8256 0344 [email protected] Jonathan Cornish (North Asia) +852 2263 9901 [email protected]
Australia: Key Performance TrendsReturn on assets and return on equity
(%)
Source: Australian Prudential Regulation (APRA),
Fitch
(%)
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011E2012F
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Of pre-provision profits (LHS)
Of average loans (RHS)
Australia: Key Performance TrendsCredit costs
(%)
Source: Fitch
(%)
Figure 5 Figure 6
0.0
0.4
0.8
1.2
1.6
2.0
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Reserve Bank of Australia (RBA), Fitch
Australia: Key Performance TrendsAsset quality - NPL ratio
0
3
6
9
12
15
2006 2007 2008 2009 2010 2011E 2012F
Total CAR Tier 1 CAR(%)
Source: RBA, Fitch
Australia: Key Performance TrendsCapital ratios
Figure 7 Figure 8
100
105
110
115
120
125
130
135
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: APRA, Fitch
Australia: Key Performance TrendsLoan/deposit ratio
0
1
2
3
4
5
2006 2007 2008 2009 2010 2011E 2012F
0
4
8
12
16
20
Real GDP growth (LHS)
Loan growth (RHS)
Australia: Key Performance TrendsReal GDP growth and loan growth
(%)
Source: Fitch, RBA
(%)
Banks
2012 Outlook: Asia-Pacific Banks
January 2012 4
China
Funding, Liquidity to Dominate: Tightening funding and liquidity will be the dominant themes
in 2012, as deposit strains intensify and banks try to balance rising forbearance burdens with
pressure to lend in support of growth. The year will reveal just how vital plentiful liquidity has
been to the stability of the Chinese banking system, and how difficult things can become when
that abundance is absent. Fitch expects banks to require large funding support to meet credit
and forbearance needs, as well as their own growing obligations.
Forbearance Burdens to Rise: As the economy slows, corporate profits fall, and more loans
extended during the credit boom come due, deterioration in asset quality is expected in several
segments of the loan portfolio. Over the near term, Fitch expects that the authorities will
continue a policy of forbearance and liquidity support for borrowers. As a result, asset-quality
issues may not appear fully in NPL ratios until well into a deterioration, if at all. Still, the fall in
cash inflows from these loans will add pressure to banks‟ cash positions, which are already thin.
CNY16.5trn of New Financing: Based on a forecast of 8.2% real GDP growth in 2012, new
financing should reach upwards of CNY16.5trn – based on Fitch‟s adjusted-Total Societal
Financing (TSF) measure. While large, this is below the CNY17.5trn estimated for 2011,
meaning credit conditions will continue to feel tight – in contrast to the easing that many are
expecting. This reflects a mixture of moderating GDP growth, ongoing property curbs, resource
constraints from thin financial sector liquidity, and a desire to avoid a repeat of 2009‟s excesses.
Lending Could Reach CNY9trn: Of the CNY16.5trn in new financing, as much as CNY9trn
could come in the form of new renminbi and foreign-currency loans. This estimate, above other
forecasts, reflects the view that as liquidity tightens and regulatory scrutiny rises, non-banks
and offshore banks could find it more difficult to continue providing large financing to Chinese
companies. Greater SME lending by banks also could reduce demand for non-bank credit,
while the crackdown on some off-balance-sheet activity suggests less credit via these channels.
If the growth of “shadow financing” does indeed decelerate, Chinese banks are likely to be
called on to fill the gap in order to maintain GDP growth, leading to higher lending than current
consensus forecasts of CNY8trn. New loans of CNY9trn would represent loan growth of 15.5%,
which is in line with previous periods of a modestly expansionary policy.
CNY4trn Assistance Required: Chinese banks possess an estimated CNY21trn in capacity to
extend new loans, roll over existing loans, and provide forbearance. While seemingly ample,
this can be exhausted quickly as CNY22trn in existing loans will be coming due in 2012 – some
of which will require forbearance and others which will be re-extended to good existing
borrowers (every CNY1 not received from, or re-extended to, existing borrowers means CNY1
less in new credit). For this reason, substantial funding assistance will be required.
Fitch forecasts CNY4trn in liquidity assistance in 2012 via a combination of reserve
requirement reductions, central bank reverse repos and auctions of MOF deposits. Reserve
requirement relief may not always take the form of blanket, system-wide required reserve ratio
(RRR) cuts, but rather targeted releases to banks in need. In this context, the nominal balance
of deposit reserves at the central bank could be a more useful indicator in signalling policy than
the RRR ratio.
What Could Change the Outlook
IDRs Stable, VRs Pressured: The Long-Term IDRs of Chinese banks are based on
expectations of varying degrees of state support, and any revisions would be tied to shifts in
the sovereign‟s perceived ability or willingness to provide such support. The VRs of some
banks could be revised down in 2012 if liquidity and funding erosion accelerates, or asset-
quality deterioration begins to threaten solvency. The most vulnerable ratings are those of
smaller banks with weaker liquidity, less deposit funding, and lower capital.
Figure 9
0
20
40
60
80
100
Positive Stable Negative
Chinese Banks: Rating
Outlooks
(%)
Source: Fitch
Related Research
Chinese Banks: Cash Cushions Thinning As Liquidity Erodes and Forbearance Burdens Rise (December 2011) Chinese Banks: Growth of Leverage Still Outpacing GDP Growth (July 2011) Fitch Affirms China's Ratings, Revises Local Currency Outlook to Negative (April 2011)
China: Key Performance TrendsReturn on assets and return on equity
(%)
Source: Fitch, banks
(%)
0
10
20
30
40
2006 2007 2008 2009 2010 2011E2012F
0.0
0.3
0.6
0.9
1.2
Of pre-provision profits (LHS)Of average loans (RHS)
China: Key Performance TrendsCredit costs
(%)
Source: Fitch, banks
(%)
Figure 12 Figure 13
0
5
10
15
20
2006 2007 2008 2009 2010 2011E 2012F
NPLs Special mention loans(%)
Source: Fitch, China Banking Regulatory Commission
(CBRC), banks
China: Key Performance TrendsClassified loans % of total loans
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011E 2012F
Total CAR Tier 1 CARTangible equity/assets
(%)
2006-07 data excludes Agricultural Bank of China
Source: Fitch, banks
China: Key Performance TrendsCapital ratios
Figure 14 Figure 15
60
65
70
75
80
85
2006 2007 2008 2009 2010 2011E 2012F
Headline ratio Adjusted ratioª(%)
ª Excludes fiscal deposits, includes undiscounted
acceptances
Source: Fitch, The People's Bank of China (PBOC)
China: Key Performance TrendsLoan/deposit ratio
-3,000
0
3,000
6,000
9,000
12,000
15,000
2006 2007 2008 2009 2010 9M11
Household Enterprise
Government Fiscal
Otherª(CNYbn)
ª Includes non-resident deposits beginning in 2011
Source: PBOC
China: Net New Deposits
Figure 16 Figure 17
0
3,000
6,000
9,000
12,000
15,000
18,000
08
0.70
09
0.18
10
0.34
11E
0.44
12F
0.40
Fitch net new add-onsNet new other financing (TSF)Net new credit financing (TSF)Change in nominal GDP
(CNYbn)
China: Fitch-Adjusted TSF
Incremental change in GDP/ net new financing
Source: Fitch, PBOC
0
2,000
4,000
6,000
8,000
10,000
2007 2008 2009 2010 Q311
Asset-backed (AB) other
AB discounted bill-related
AB loan-related(CNYbn)
ª Excludes private placements, which are undisclosedb Many were previously grouped with bill WMPs
Source: Wind Information
China: Wealth Management
Products Outstandinga
b
Banks
2012 Outlook: Asia-Pacific Banks
January 2012 6
Hong Kong
Key Risk Factors: Fitch identifies concentration on real estate; a volatile operating
environment; and opportunistic expansion to China as key risk factors for the Hong Kong banks.
Strong collateral, liquidity and capital buffers are substantiating the relatively high rating levels
that the Hong Kong banks retain, despite moderate market positions in the case of most banks.
Expansion into China: Fitch expects the growth of Hong Kong banks to be tied to expansion
into mainland China – which could, if successfully executed, boost revenue and broaden loan
diversification. Related risks stem from a weaker operating environment, untested collateral
recoveries, and more prevalent corporate governance and transparency issues. Hong Kong
banks‟ mainland exposures have often been short-term, trade-related and collateralised.
Adequate Profitability: Profitability has recovered since 2009, but the low-interest-rate
environment will pressure interest margins unless the banks keep repricing loans. In addition,
the steady pursuit of medium-term funding (to match asset tenors more closely) will improve
liquidity profiles but increase funding costs. Lower global economic activity, particularly trade
coupled with weakening domestic property markets and higher inflation, will possibly lead to
higher credit costs in 2012 (see Figure 20).
Strong Capital: If Basel III had to be implemented right now, Fitch‟s simulation indicates that
Hong Kong banks would encounter very little difficulty in meeting a conservative
implementation of the more stringent requirements. The agency believes that the Hong Kong
banking system qualifies for a counter-cyclical buffer set at the maximum 2.5% level, and
accordingly expects that the banks will increase their regulatory reserves further.
Vulnerable to Bank Risk: Credit risk remains balanced between corporate and bank lending
(mostly to UK and Asia Pacific banks), at 36% and 33% of consolidated assets, respectively, at
end-November 2011. Adding in their substantial holdings of securities – at 20% of consolidated
assets, and which are weighted more towards bank debt – indicates that Hong Kong banks are
vulnerable to deterioration in bank credit and a widening in credit spreads.
Liquidity Pressures Manageable: Funding benefits from established deposit franchises
despite most deposits being short-term. The risk of sudden withdrawals in bank and deposit
funding is counterbalanced by substantial liquid assets (cash, bank deposits, securities),
amounting to 54% of system-wide assets at end-November 2011. Fitch anticipates that Hong
Kong banks would eventually cut back their expansion to China if liquidity tightened drastically.
Contagion Risk: In Fitch‟s view, Hong Kong banks remain vulnerable to waning investor
confidence – in global growth in general, and China in particular. The banking sector is
dependent on foreign bank funding, which amounted to 28% of total liabilities at end-
September 2011 (2010: 26%). The five largest funding providers (Japanese, Singapore, US,
Chinese and UK banks) accounted for a stable 17% of total liabilities, and western European
banks 9%. That said, Hong Kong banks have made insignificant use of capital markets funding.
What Could Change the Outlook
Ratings Headwinds: While the Outlooks on the Long-Term IDRs of all Fitch-rated Hong Kong
banks is Stable, the agency believes that a stronger-than-expected macroeconomic
deterioration and the banks‟ increasing exposure to mainland China could lead to negative
rating action. Fitch‟s analysis will focus on any notable changes in risk management capacity,
lending strategies, growth aspiration, capital and contingent liquidity planning.
As some of the Hong Kong banks are linked to their Chinese state-owned or Singaporean
parents, a change in the parents‟ credit profile or willingness to provide support could affect the
ratings of those Hong Kong banks.
Figure 18
0
20
40
60
80
100
Positive Stable Negative
Hong Kong Banks: Rating
Outlooks
(%)
Source: Fitch
Reliance on property collateral.
Volatile operating environment.
Opportunistic expansion to China.
Related Research
Hong Kong Banks‟ Exposure to Europe (November 2011) China‟s Growing Importance for Hong Kong Banks (October 2011) Hong Kong (Special Administrative Region, PRC) (October 2011)
Reasonable Credit Profiles: Fitch expects the structural balance sheet issues of many rated
Philippine banks (including concentrated loan books and foreclosed properties with poor
reserves) to be a main source of impairment, especially if the rising global uncertainties were to
significantly affect domestic operating conditions. However, the agency believes most major
local banks can cope with a fresh downturn, thereby preserving their liquidity and capitalisation.
Loan Concentration: Many banks‟ loan books are concentrated on a few large accounts, with
the top 20 borrowers/equity ratio ranging from 150%-200%, and hence may face the risk of a
rapid weakening of asset quality in a difficult credit environment. However, many Philippine
corporations have a reasonable record through economic cycles (owing partly to their healthy
balance sheets), thereby supporting the asset quality of the broader system. The Philippines‟
credit/GDP ratio of an average 34% over 2006-2010 was among the lowest in Asia.
Other Long-Standing Concerns: Most banks maintain low reserves on foreclosed properties
(see Figure 74), which exposes them to provisioning risks in a protracted downturn. Two rated
banks – Land Bank of the Philippines („BB‟/Stable) and Rizal Commercial Banking Corp. („BB‟/
Stable) – are still amortising their deferred charges, which represent previous years‟ disposal
losses not immediately recognised owing to a forbearance by Bangko Sentral ng Pilipinas (BSP,
the central bank). However, such impairment risks are largely buffered by the banks‟ capital.
Improved Capital: Fitch expects most rated Philippine banks to maintain sound core capital,
which is vital in mitigating risks from their balance sheets and the operating environment. Local
capital rules under Basel III – effective 1 January 2014 – are unlikely to be onerous for the
banks. Their average core Tier 1 CAR (without hybrids) was 12.9% at end-September 2011, up
from 11.0% at end-2009 due to fresh common equity and retained profit.
Liquid and Deposit-Funded: Most major banks in the country have liquid balance sheets and
deposits as their main funding source, thanks to ample domestic liquidity. With the system-wide
loan/deposit ratio of 60% (see Figure 73), Basel III‟s liquidity standards may be less
burdensome for the Philippine banks.
Record Profitability May Ease: Fitch expects trading income – which drove banks‟ profitability
to historical highs in 2010-9M11 – will be difficult to sustain in 2012. However, some banks may
opt to book one-time unrealised paper gains on their held-to-maturity bonds (which have up
until now been recorded at costs), solely by adopting Philippine Financial Reporting Standards
9 on Financial Instruments earlier than the effective date of 1 January 2013. Treasury gains
may also result from any decline in interest rates, but could be offset by tighter margins and
rising credit costs.
What Could Change the Outlook
Negative Rating Triggers: Excessive growth, together with a weakened loss-absorption buffer
in a difficult environment, would be ratings negative. Downside rating pressure may also result
from a fresh economic slowdown, particularly if sharp and prolonged and resulting in significant
capital impairment risks for the banks. However, the banks‟ ratings are already fairly low, and
Fitch believes the impact of higher credit costs – even under the agency‟s stress test – to be
manageable for most rated local banks, owing to their reasonable loss-absorption capacity.
Positive Rating Triggers: A sustainable asset-quality record may be positive for lower-rated
Philippine banks, many of which have higher levels of non-performing assets than their
domestic peers. Domestic consolidation could also be ratings positive, particularly for small-
and medium-sized banks merging with larger players of a stronger credit standing.
Figure 68
0
20
40
60
80
100
Positive Stable Negative
(%)
Source: Fitch
Philippine Banks: Rating
Outlooks
Related Research
Stress Test on Philippine Banks (August 2009) Philippines Banks: Annual Review and Outlook for H211/2012 (July 2011) 2012 Outlook: Philippines Banks (December 2011)
Taiwan: Key Performance TrendsReturn on assets and return on equity
(%)
Source: Fitch, Central Bank of the Republic of China
(Taiwan) (CBC)
(%)
0
30
60
90
120
2006 2007 2008 2009 2010 2011E2012F
0.0
0.3
0.6
0.9
1.2
Credit costs PPOP (LHs)
Credit costs loans (RHS)
Taiwan: Key Performance Trends Credit costs % PPOP and loans
(%)
Source: Fitch, CBC
(%)
Figure 99 Figure 100
0.0
0.5
1.0
1.5
2.0
2.5
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, CBC
Taiwan: Key Performance TrendsAsset quality - NPL ratio
0
3
6
9
12
15
2006 2007 2008 2009 2010 2011E 2012F
Total CAR Tier 1 CAR(%)
Source: Fitch, CBC
Taiwan: Key Performance TrendsCapital ratios
Figure 101 Figure 102
0
20
40
60
80
100
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, CBC
Taiwan: Key Performance TrendsLoan/deposit ratio
0
40
80
120
160
200
240
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, CBC
Taiwan: Key Performance TrendsAsset quality - NPL reserve coverage ratio
Banks
2012 Outlook: Asia-Pacific Banks
January 2012 30
Thailand
Resilient Despite Potential Shocks: The stable outlook on major Thai banks is based on
Fitch‟s expectation that the banks will remain resilient in the face of economic shocks caused
by the severe flooding in Q411 and potential contagion effects of the eurozone crisis. Their
maintenance of strong capital and profitability, as well as an expected post-flood economic
rebound, should help carry them through a challenging year.
Post-Flood Rebound: The severe flooding has affected manufacturers in key industrial
estates, as well as SMEs that form part of their supply chain and people living in Thailand's
central region. This is likely to result in negative GDP growth in Q411 as business and
spending have been disrupted. In 2012, Fitch expects a strong post-flood rebound in: economic
activity; loan demand for the rehabilitation of damaged properties; and spending on future flood
protection.
Fitch forecasts GDP to rise by 4.0% in 2012 as the economy rebounds from the earthquake-
and flood-related supply-chain shocks of 2011.
Moderately Higher NPLs Expected: Regulatory forbearance by The Bank of Thailand has
allowed banks and non-bank financial institutions that provide financial assistance to flood-
affected borrowers to maintain the existing credit status of their customers over the next six to
12 months. Based on these guidelines, banks have so far estimated a moderate increase in
NPLs and provisions in 2012. This implies that asset quality would be weaker than the reported
ratios indicate.
More Cautious on Funding: A surge in issuance of bills of exchange (B/Es) by Thai banks in
2011 has made Fitch more cautious over their funding structures, particularly smaller banks
which are more vulnerable to funding risks. However, the concern could be alleviated by
prospective new B/E regulations being drafted by the regulators in 2012. The areas under
discussion include raising the minimum denomination and charging fees on outstanding B/Es –
which Fitch expects will help curb the growth in B/E issuance.
Capital Cushion: In spite of potential increased provisioning, the strong Tier 1 capital ratio of
the seven largest banks (September 2011: 11.05%) and improved loan-loss coverage should
be able to absorb such risks, even in a severe stress scenario, although a few banks with lower
reserves and profitability could be heavily hit.
What Could Change the Outlook
Worse-Than-Expected Impact: Downside risk to Fitch's view could stem from a delayed
recovery process, which could lead to a significantly worse-than-expected impact on asset
quality and provisioning, to the extent that capital strength is compromised. This could lead to
Fitch's outlook on major Thai banks being revised to negative – with negative rating action on
affected banks also likely.
Increased Funding Risk: A significantly increased reliance on non-deposit funding in the
domestic market or on foreign-currency wholesale funding due to higher exposure to foreign-
currency lending, could lead to increased liquidity risk in a volatile funding environment – in
particular for small- to medium-sized banks. This could have negative implications for the
overall outlook.
Figure 103
0
20
40
60
80
100
Positive Stable Negative
(%)
Source: Fitch
Thai Banks: Rating
Outlooks
Strong capital and profitability to help absorb potential economic shocks.
Expect moderate increase in NPLs from floods.
Funding risk mitigated by prospective new regulations.
Rating Outlook
SS TT AA BB LL EE
Banking Systemic Risk Indicator Thailand C1
Related Research
Fitch: Thai Financial Institutions Resilient to Flood Impact (October 2011) Thailand Floods – Assessing the Impact on the Thai Sovereign Profile (October 2011) Outlook 2012: Major Thai Banks (December 2011)
Thailand: Key Performance TrendsReturn on assets and return on equity
(%)
Source: Fitch, banks
(%)
0
20
40
60
80
2006 2007 2008 2009 2010 2011E2012F
0.0
0.5
1.0
1.5
2.0
Of pre-provision profits (LHS)
Of average loans (RHS)
Thailand: Key Performance TrendsCredit costs
(%)
Source: Fitch, banks
(%)
Figure 106 Figure 107
0
2
4
6
8
10
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, banks
Thailand: Key Performance TrendsAsset quality - NPL ratio
0
5
10
15
20
2006 2007 2008 2009 2010 2011E 2012F
Total CAR Tier 1 CAR(%)
Source: Fitch, banks
Thailand: Key Performance TrendsCapital ratios
Figure 108 Figure 109
0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, banks
Thailand: Key Performance TrendsLoan/deposit ratio
0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011E 2012F
(%)
Source: Fitch, banks
Thailand: Key Performance TrendsNPL reserve coverage ratio
Banks
2012 Outlook: Asia-Pacific Banks
January 2012 32
Vietnam
Volatile Operating Conditions: The ratings of the major Vietnamese banks are amongst the
lowest in Asia, reflecting Fitch‟s belief that the local operating environment will stay challenging.
This is particularly due to persistently high inflation, interest rates and tight domestic liquidity,
which have already strained banks' asset quality and funding. However, such risks may be
partly counterbalanced by government efforts to bring about some economic stability and
banking system restructuring, although success in execution remains to be seen.
Regulatory Push for Consolidation: Fitch believes that the broader financial system will
benefit from banking sector consolidation, noting that smaller banks are fairly dependent on
interbank borrowings – and may therefore be disruptive to the financial sector in an insolvency
scenario. This development is in line with the regulator‟s aspirations, although more progress is
needed in view of the high number of small banks in Vietnam.
Tight Funding and Liquidity: While loan growth in 2012 may stay modest, the loan/deposit
ratio could remain above 100%. Against an environment of rapidly rising prices, the regulatory
cap on deposit rates – at a level that is lower than the reported inflation rate – moderates the
funding flexibility of Vietnamese banks. Furthermore, there is some reliance on wholesale
borrowing, which exposes banks to refinancing risks in a liquidity-crunch scenario.
Weak Capital Position: Fitch assesses that greater capital buffers are required to mitigate the
structural and volatile conditions in the domestic environment. The reported average Tier 1
capital ratio of the major banks was about 9% in 2011, which is low by regional comparison.
However, capitalisation has been rising gradually since 2009, owing largely to efforts to raise
equity, together with slower loan growth. Strategic foreign investments (capped at a minority
stake) in the local banks may bring about positive changes, albeit more likely in the longer term.
Asset Quality Deterioration: Asset quality is likely to weaken further. Borrowers face
refinancing risks in view of the local banks‟ tight liquidity; a substantial devaluation of the
Vietnamese dong against the US dollar increases the risks of foreign-currency loans (about
20% of loans); and a prolonged financial burden from the high interest rates and inflation. In
addition, several real estate companies and state-owned enterprises (SOEs) have reportedly
been facing repayment difficulties, which led in turn to a rise in NPLs in 2011.
NPLs are Understated: Transparency remains an issue. Reported NPLs under the
Vietnamese Accounting Standards (VAS) may be understated by 3x-4x than those under
International Financial Reporting Standards (IFRS); and are largely categorised as “special
mention” (one category before NPLs). Fitch notes that some banks are still classifying loans to
the troubled state-owned enterprise Vietnam Shipbuilding Industry Group – and even loss-
making SOEs – as performing.
Profitability Likely to Moderate: While the major Vietnamese banks have reported earnings
growth in 2011, Fitch believes profitability will moderate in 2012 due to intense competition for
deposits and a further rise in credit costs.
What Could Change the Outlook
Standalone Profiles: There appears to be limited rating upside against the persistently
challenging operating environment in Vietnam. Meanwhile, as the major Vietnamese banks‟
ratings are already amongst the lowest in Asia (being in the „B‟ category), any negative rating
action to the banks‟ VRs – which reflect banks‟ standalone credit profiles – would suggest an
increased threat to the banks‟ solvency position.
Sovereign Ratings: Any downward rating action on the sovereign ratings may reflect a similar
change in the ratings of state-owned banks, which are premised on state support. At present
(January 2012), the sovereign ratings are on a Stable Outlook.
Figure 110
0
20
40
60
80
100
Positive Stable Negative
(%)
Source: Fitch
Vietnamese Banks: Rating
Outlooks
Rating Outlook
SS TT AA BB LL EE
Banking Systemic Risk Indicator Vietnam E2
Related Research
Fitch: Vietnam Banks' Capital Plans Positive; More Needed (October 2011) Fitch: Vietnam Bank Consolidation Is Much Needed Positive Step (December 2011)