2012 outlook asia-pacific banks

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

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]

http://www.fitchratings.com/outlooks

Banks

2012 Outlook: Asia-Pacific Banks

January 2012 2

Australia

Reliance on Wholesale: Wholesale funding is concentrated in the four major banks, which

account for around 80% of system assets. Such reliance is likely to decline further in 2012 as

deposit growth continues to outstrip credit growth. Weak demand for credit will play a

significant role, but most banks appear more intent on building and preserving the proportion of

deposits in their funding mix. Nonetheless, reliance on wholesale funding remains high, and is

the main reason for the Long-Term IDRs being on RWN.

Balance Sheets Bolstered: An upward trend in capital and liquidity ratios looks set to continue

into 2012, as Australian banks ready themselves for more onerous regulatory requirements

under Basel III. More broadly, Fitch considers Australian regulatory requirements for capital

adequacy to be relatively conservative – as evident in high risk-weightings (eg residential

mortgages) and capital charges (eg interest-rate risk in the banking book).

Modest Growth Prospects: Credit growth shows no signs of accelerating in 2012, as cautious

consumer and business sectors monitor and evaluate the impact on the Asia-Pacific region of

volatility in Europe and the US. Australian banks' balance sheets remain healthy and capable

of producing robust results; but while this air of caution prevails, profit growth is likely to be flat-

to-modest at best.

Sound Asset Quality: Although growth is likely to be modest, economic activity should be

sufficiently robust to support stable asset quality. Asset mixes for Australian banks are

relatively low-risk, being weighted towards secured residential and small businesses loans, with

little by way of exposure to proprietary trading assets. Although household debt levels are

relatively high, strong collateral positions and mortgage insurance offer considerable protection

against any substantial loss in the event of a downturn in Australia's housing market.

Impact from Global Developments: Australian banks are better placed than in 2007 to deal

with any potential economic turmoil, having taken appropriate steps to tighten underwriting,

strengthen liquidity and improve capital. The most likely source is a China-led economic

downturn in the Asia-Pacific region, precipitated by further deterioration in Europe. However,

there is flexibility to absorb shocks through Australia's floating exchange rate, and to provide

stimulus via adjustments to fiscal and monetary policy.


Financial Market Disorder: Market disorder has the potential to disrupt the banks' wholesale

funding initiatives in 2012. Liquidity holdings and active pre-funding in wholesale markets

provide a buffer, should there be an extended period of dislocation.

Imprudent Growth: With credit demand forecast to be weak in 2012, banks may be tempted to

loosen underwriting standards in the pursuit of loan growth. A major loosening of standards

could lead to negative rating action.

Terms of Trade Reversal: The negative effects of a sharp reversal in Australia's terms of

trade could flow through to the job market and bank asset quality. As of January 2012, Fitch

views this scenario as unlikely.

Figure 2

0

20

40

60

80

100

Positive

Outlook/

Watch

Stable

Outlook

Negative

Outlook/

Watch

Australian Banks: Rating

Outlooks/Watches

(%)

Source: Fitch

Reliance on wholesale funding is declining, but remains significant.

Sound asset quality and continued improvements in liquidity and capital.

Slow credit growth makes profit growth difficult.

Rating Outlook

NN EE GG AA TT II VV EE

Banking Systemic Risk Indicator

Australia B2

Analysts

Tim Roche +61 2 8256 0310 [email protected] John Miles +61 2 8256 0344 [email protected]

mailto:[email protected]


Banks


January 2012 3

Figure 3 Figure 4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2006 2007 2008 2009 2010 2011E2012F

0

3

6

9

12

15

18

ROA (LHS) ROE (RHS)

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


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.


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)

Analysts

Charlene Chu +8610 8517 2112 [email protected] Chunling Wen +8610 8517 2105 [email protected] Hiddy He +8610 8517 2135 [email protected]

Rating Outlook

SS TT AA BB LL EE


China D3

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=658055





http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=703565




Banks


January 2012 5

Figure 10 Figure 11

0.0

0.3

0.6

0.9

1.2

2006 2007 2008 2009 2010 2011E2012F

0

6

12

18

24

ROA (LHS) ROE (RHS)

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

(%)


(%)

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


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


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.


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


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)

Analysts

Sabine Bauer +852 2263 9966 [email protected] Joyce Huang +852 2263 9595 [email protected]

Rating Outlook

SS TT AA BB LL EE


Hong Kong B3






Banks


January 2012 7

Figure 19 Figure 20

0.0

0.3

0.6

0.9

1.2

1.5

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

25

ROA (LHS) ROE (RHS)

Hong Kong: Key Performance

TrendsReturn on assets and return on equity

(%)

Source: Fitch, Hong Kong Monetary Authority (HKMA)

(%)

0

6

12

18

24

30

2006 2007 2008 2009 2010 2011E2012F

0.0

0.2

0.4

0.6

0.8

1.0



TrendsCredit costs

(%)

Source: Fitch, rated banks

(%)

Figure 21 Figure 22

0.0

0.5

1.0

1.5

2.0

2006 2007 2008 2009 2010 2011E 2012F

(%)

ª Exposures graded "substandard", "doubtful" or "loss"

Source: Fitch, HKMA


TrendsAsset quality - Impaired loan ratioª

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F


Source: Fitch, HKMA


TrendsCapital ratios

Figure 23 Figure 24

0

20

40

60

80

2006 2007 2008 2009 2010 2011E 2012F

(%)

Source: Fitch, HKMA


TrendsLoan/deposit ratio

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0

25

50

75

100

MCE/assets (LHS)Growth in MCE (RHS)


TrendsGross Mainland China Exposures (MCE)

(%)

Source: Fitch, HKMA

(%)

Figure 25 Hong Kong Banking Sector’s Exposure to Mainland China (HKDbn) 2008 2009 2010 Jun 2011 Sept 2011

Non-bank mainland China exposure 858 1,006 1,622 2,034 2,195 Claims on mainland banks 333 379 1,057 1,639 1,791 Sum: Gross MCE 1,191 1,385 2,679 3,673 3,986 Gross MCE/assets

a (%) 9.9 11.4 19.2 24.0 25.2

a Including overseas offices and exposure of the mainland subsidiaries of Hong Kong-incorporated authorised institutions

Source: HKMA, Fitch

Banks


January 2012 8

India

Economic Turnaround is Key: The stable outlook for Indian banks is premised on a recovery

in the domestic economy in 2012, together with a continued commitment by government to

maintaining a minimum Tier 1 ratio of 8% for its banks (accounting for 73% of system assets).

While this is a base-case scenario, the pressures on the downside are mounting – through

weakening asset quality and a build-up in credit concentration.

Problem Partly Cyclical: Borrowers are affected by rising input costs, including interest rates;

a slowdown in demand growth; and sharply fluctuating exchange rates. Part of the problem

may ease in mid-2012 if monetary policy were to be relaxed to stimulate growth, though the

timing is uncertain given the cost-push of the 11% depreciation of the rupee since January

2011 – and its impact on the stubbornly high inflation rate (7.47% in December 2011).

Rise in Stressed Assets: The momentum of rising NPLs may continue through most of 2012.

Stresses are also building up in infrastructure loans – caused by delays in project

implementation and cost overruns. Some of these are being restructured; the high single-name

concentrations in this business may push up state-owned banks‟ restructured portfolios to 7%-

8% of total loans, significantly higher than the 4.4% level in the aftermath of the 2008 global

financial crisis.

Contained Credit Losses: While the immediate outlook on Indian infrastructure is negative,

the long-term viability of the projects – which is still intact – may help limit credit losses.

However, these stressed assets are very thinly reserved, and government banks‟ profit may be

eroded by 15%-20% if some loans were to turn non-performing. Profitability could also come

under pressure through a volatile net interest margin. Nevertheless, pre-provision operating

profit should generally be adequate to absorb the rising costs, leaving equity intact.

Equity Injection by Government: As in 2008, government is expected to play a key role in

maintaining stability of the banking system through periodic injections of core equity. Fitch

understands than a 10-year capitalisation plan is under consideration, which includes

maintaining majority shareholding and targeting a core Tier 1 ratio of at least 8% – possibly

more for the larger, systemically important banks. The timeliness of such support may come

under pressure as the government struggles with containing the fiscal deficit.

Funding Primarily Through Deposits: Bank funding is mostly domestic (94%), and

dominated by customer deposits. However, the deficit liquidity mode and rising short-term

funding gaps in government banks increases the refinancing risk, moderated by the slowdown

in loan growth and the large holding (20% of assets) of government securities that banks could

potentially repo with the Reserve Bank of India (RBI) in a crisis.


Sustained Economic Weakness: If the Indian economy continues to slow down through most

of 2012, the resulting problems relating to asset quality could hurt VRs. The IDRs of

government banks are closely aligned with the sovereign, and could clearly therefore be

affected by any change in the sovereign rating.

Lack of Timely Equity: Should expectations weaken over government providing a timely

equity injection early in 2012, then this could have an impact on the VRs of government banks

– and, if chronic, even the IDRs.

Figure 26

0

20

40

60

80

100


(%)

Note: Based on National Ratings

Source: Fitch

Indian Banks: Rating

Outlooks

Rating Outlook

SS TT AA BB LL EE


India C1

Related Research

2012 Outlook: Indian Banks (January 2012)

Analysts

Ananda Bhoumik +91 22 4000 1720 [email protected] Saswata Guha +91 22 4000 1741 [email protected]

Challenges greater than during the 2008 crisis.




Banks


January 2012 9

Figure 27 Figure 28

0.0

0.5

1.0

1.5

2.0

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

ROA (LHS) ROE (RHS)

India: Key Performance TrendsReturn on assets and return on equity

(%)

Note: The years represent fiscal years ending March


(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0.0

0.3

0.6

0.9

1.2


India: Key Performance TrendsCredit costs

(%)



(%)

Figure 29 Figure 30

0

1

2

3

4

2006 2007 2008 2009 2010 2011E 2012F

(%)


Source: Fitch, RBI

India: Key Performance TrendsAsset quality - NPL ratio

0

4

8

12

16

2006 2007 2008 2009 2010 2011E 2012F



Source: Fitch, RBI

India: Key Performance TrendsCapital ratios

Figure 31 Figure 32

0

20

40

60

80

2006 2007 2008 2009 2010 2011E 2012F

(%)


Source: Fitch, RBI

India: Key Performance TrendsLoan/deposit ratio

0

10

20

30

40

2006 2007 2008 2009 2010 2011E 2012F

Nominal GDP growth

Loan growth(%)


Source: Fitch, RBI

India: Key Performance TrendsNominal GDP growth and loan growth

Banks


January 2012 10

Indonesia

Limited Impact from Headwinds: Fitch believes that Indonesian banks should remain

resilient to challenging conditions in the global economy. Steady earnings, adequate

provisioning and sound capital provide a reasonable buffer. The direct impact of the European

debt crisis on Indonesian banks should be limited, in light of the size of the domestic economy

and little direct market exposure.

Strong Domestic Demand: While Indonesian GDP has been revised downward for 2012 in

the light of global pressures, 6% growth should remain achievable – due in large part to a

domestically orientated economy.

Increasing Risk to Growth: Brisk economic growth does, however, have the potential to

increase the pressures on the financial system. Fitch has revised Indonesia‟s Macro-Prudential

Indicator (MPI; see Macro-Prudential Risk Monitor, dated 8 December 2011) to „3‟ from „2‟,

despite the sovereign upgrade to „BBB−‟.

Resilient Earnings But Lower: Fitch expects the banks to continue delivering solid core

profitability in 2012, as lower funding costs and manageable credit costs offset competitive

pressures; and with lower (but still healthy) loan growth at around 15%. The net interest margin

– among the highest in Asia – remains strong but under pressure, as the rising competition for

market share may dampen net interest margins to some extent (see Figure 39).

Manageable Asset Quality: NPLs are more likely to start trending upwards from their

historical lows, in light of rapid loan growth in the past few years. Nevertheless, Fitch expects

both asset quality (see Figure 36) and credit costs (see Figure 35) to remain manageable in

2012 amid domestic economic conditions which are still favourable.

Sufficient Capital Buffer: Core capital should remain adequate, despite trending down, as the

pressure on capital is counterbalanced by greater earning retention, moderating loan growth

and capital injection. Furthermore, equity-capital buffers should remain reasonable in light of

the healthy earnings which act as a first line of defence against losses, and in view of the

conducive local economy.

Higher LDRs: Loan/deposit ratios (LDRs) should continue to rise, with liquidity in US dollars

staying tight, but Fitch does not see these as excessive at this stage (see Figure 38). While a

sustained economic trajectory should lead to healthy deposit expansion in the medium term,

loan growth will continue to outstrip deposit growth – which may add to funding pressures for

entities with weaker franchises.


Sovereign Rating: A sovereign rating change could lead to a similar change for some of the

banks – due to significant state ownership, foreign parents and systemic importance.

Rapid Loan Expansion: Reckless loan growth that notably exerts pressure on earnings and

quality such that capital impairment risk rises significantly could be negative for the banks‟

outlooks and/or ratings. However, Fitch views this likelihood as low at this stage in view of the

banks‟ solid earnings and funding profiles.

Figure 33

0

20

40

60

80

100


(%)

Source: Fitch

Indonesian Banks: Rating

Outlooks

Related Research

2012 Outlook: Indonesian Banks (December 2011) Macro-Prudential Risk Monitor (December 2011)

Analysts

Julita Wikana +6221 2902 6405 [email protected] Iwan Wisaksana +6221 2902 6406 [email protected] Stefanus Yuniardhi +6221 2902 6407 [email protected]

Resilient to external challenges; supported by sovereign strength.

High loan growth a potential concern for asset quality.

Rating Outlook

SS TT AA BB LL EE


Indonesia D3






Banks


January 2012 11

Figure 34 Figure 35

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

25

30

ROA (LHS) ROE (RHS)

Indonesia: Key Performance


(%)

Source: Fitch, 9 major banks

(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0.0

0.6

1.2

1.8

2.4




TrendsCredit costs

(%)


(%)

Figure 36 Figure 37

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011E 2012F

(%)



TrendsAsset quality - NPL ratio

0

6

12

18

24

2006 2007 2008 2009 2010 2011E 2012F





Figure 38 Figure 39

0

25

50

75

100

2006 2007 2008 2009 2010 2011E 2012F

(%)




0

2

4

6

8

2006 2007 2008 2009 2010 2011E 2012F

(%)



TrendsNet interest margin

Banks


January 2012 12

Japan

Support-Driven IDRs: The IDRs of Japan‟s major banks are underpinned by Fitch‟s

expectation of state support, should it be required. The Japan sovereign rating‟s Negative

Outlook indicates a better-than-even chance of a downgrade over the next 12-18 months. A

sovereign downgrade would have an impact on Fitch's assessment of the ability of the

sovereign to provide support, and substantial weakening could possibly result in a change in

the banks‟ IDRs.

Maintaining a Stable Profile: Fitch believes the major banks‟ robust liquidity position and solid

asset quality will remain unchanged even in the current uncertain operating conditions, and will

underpin the stability of financial profiles. Although a weakening global economy would

constrain growth in pre-provision profits (PPPs), PPPs should remain sufficient to cover losses

– eg from loan-loss charges and/or stock investment losses, as well as an introduction of a

lower tax rate from December 2011.

Modest Pre-Provision Profit: Domestic net interest income may fall further as weak loan

demand in the domestic corporate sector is likely to persist, although there is little room for the

already-very-low net interest margin to shrink further. Non-interest income should also decline

without the high bond gains posted in the fiscal year ending March 2012 (FYE12). Performance

at some of the non-bank subsidiaries may also limit non-interest income. The fall in domestic

revenue is likely to offset the effects from cost-reduction and overseas earnings growth.

Gradual Capital Growth: The agency feels that modest accumulation of retained earnings

should continue in FYE13. Risk-weighted assets are unlikely to increase significantly, despite

the implementation of Basel 2.5 and Basel 3, as risk exposure in trading accounts is negligible

– unlike the picture at the major international banks. Their core capital ratio defined by Fitch is

therefore expected to grow steadily.

Overseas Operations to Expand: With limited growth prospects for domestic earnings, Fitch

expects that the major banks will expand their offshore operations further, both organically and

non-organically. Although higher earnings from overseas should contribute to their PPPs, the

agency expects the growth to be rather gradual – unless there are significant developments

such as major acquisitions.


Rating Triggers for IDRs: Positive changes in VRs are not likely to affect IDRs, given the gap

between IDRs and VRs. As the Long-Term IDRs are at their Support Rating Floor of „A‟, any

negative rating action is most likely to stem from any perceived significant weakening in either

the ability or willingness of Japan‟s sovereign to provide support.

Rating Triggers for VRs: Meaningful and sustainable growth in PPPs and/or an above-

expectation reduction in stock investments will exert positive pressure on VRs. Conversely,

unexpected spikes in loan-loss charges and/or stock investment losses may pressure the VRs,

if such losses exceed PPPs and threaten core capitalisation. Aggressive inorganic offshore

investment could trigger a rating action, depending on the amount of investment and the

potential impact on the banks' risk and/or financial profiles.

Figure 40

0

20

40

60

80

100


(%)

Source: Fitch

Japanese Banks: Rating

Outlooks

Rating Outlook

SS TT AA BB LL EE


Japan C1

Analysts

Chikako Horiuchi +81 3 3288 2972 [email protected] Reiko Toritani +81 3 3288 2673 [email protected] Miki Murakami +81 3 3288 2686 [email protected]

Stability maintained despite global uncertainties.

Weak PPPs should still be sufficient to cover costs, and result in further accumulation of retained earnings.

Banks


January 2012 13

Figure 41 Figure 42

-0.4-0.20.0

0.20.40.60.8

2006 2007 2008 2009 2010 2011E2012F

-6-30

36912

ROA (LHS) ROE (RHS)

Japan: Key Performance TrendsReturn on assets and return on equity

(%)


Source: Fitch, Japan's 3 'Mega' Banks

(%)

0

15

30

45

60

75

90

2006 2007 2008 2009 2010 2011E2012F

0.0

0.2

0.4

0.6

0.8

1.0

1.2


Japan: Key Performance TrendsCredit costs

(%)



(%)

Figure 43 Figure 44

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008 2009 2010 2011E 2012F

(%)



Japan: Key Performance TrendsAsset quality - NPL ratio

0

4

8

12

16

20

2006 2007 2008 2009 2010 2011E 2012F




Japan: Key Performance TrendsCapital ratios

Figure 45 Figure 46

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011E 2012F

(%)



Japan: Key Performance TrendsLoan/deposit ratio

-4

-2

0

2

4

91 93 95 97 99 01 03 05 07 09 11E13F

0.6

0.8

1.0

1.2

1.4

Bank lending to GDP (RHS)GDP deflator (LHS)

Change in GDP Deflator vs. the

Gap Between Bank Lending and

GDP (Nominal)

(%)


Source: Cabinet Office, Bank of Japan, Fitch

(%)

Banks


January 2012 14

Malaysia

Sound Profiles Through Cycles: Fitch expects the credit standing of the rated Malaysian

banks to remain steady, noting that the direct impact on their financial profiles from the ongoing

sovereign crisis in Europe is unlikely to be significant. Against the backdrop of a fresh downturn

resulting from the mounting global headwinds, rated local banks are in Fitch‟s view likely to

emerge with fairly intact balance sheets – owing mainly to their satisfactory loss-absorption

qualities and risk management, as well as a prudent regulatory environment.

Earnings Likely to Moderate: Fitch, however, envisages weaker profitability for Malaysian

banks in 2012 (see Figure 48) as credit costs begin to rise (see Figure 49). This is because the

Malaysian economy and banking system are not immune to a weak global economy, in view of

the country‟s high degree of openness to external trade and vulnerabilities of certain sectors.

Household Debt Risk: The agency sees the issue of household debt as particularly significant

– at 76% of end-2010 GDP (see Figure 53) – as this leaves the banking sector vulnerable to

sharp rises in unemployment and interest rates. However, Bank Negara Malaysia (BNM, the

central bank) may take further precautionary measures (in addition to those introduced in 2010-

H111) to prevent individuals from over-borrowing. This, together with banks‟ risk management,

underpins a low probability of widespread asset-quality deterioration in loans to individuals

Satisfactory Capital: Fitch assesses the core capitalisation of major Malaysian banks – while

slightly lower by regional comparison – as satisfactory, with an average core Tier 1 CAR

(without hybrids) of about 9%. The agency expects the local banks‟ capital positions to stay

broadly stable. This is also observed under Fitch‟s stress test, where the impact of higher credit

costs can be absorbed largely through banks‟ earnings – which leaves just a limited risk of

capital erosion.

Comfortable Funding and Liquidity: Fitch anticipates that Malaysian banks will still derive

their funding primarily from deposits – due to ample domestic liquidity, especially since the

system-wide loan/deposit ratio has been stable at about 80% over the past five years. However,

competition may hamper deposit-gathering efforts for some local banks in their key overseas

markets where loan/deposit ratios hover around a higher range of 90%-100%.

Basel III Impact: Fitch believes that most major Malaysian banks are able to meet the new

capital ratio minimums under Basel III. While capital deductions – guidelines of which are still

pending – may be significant for a few banks, the extended implementation period (until 2019)

provides banks with the time to build up equity through retained earnings. However, liquidity

rules, by comparison, may be more difficult to comply – an issue also voiced by banks and

regulators globally – and hence are only expected to be finalised after the observation periods.


A Prolonged Downturn: There could be downward rating implications from a fresh economic

downturn, particularly if sharp and protracted and resulting in significant capital impairment

risks for the Malaysian banks. However, Fitch views this likelihood as relatively low, in view of

the banks‟ satisfactory loss-absorption buffer and track record.

Regionalisation: Downside rating risks could result for banks that expand aggressively into

less-developed markets with legal and/or regulatory concerns, and concurrently reduce core

capitalisation. Such a likelihood is low, as Fitch assesses management as generally retaining a

modest risk appetite and mindful of challenges in the operating environment abroad.

Consolidation: Fitch foresees the pressure for domestic consolidation as likely to increase,

since the liberalisation of the Malaysian banking sector could gather pace in the medium term.

This may reduce the number of local banks, but leave them individually with a stronger balance

sheet and franchise.

Figure 47

0

20

40

60

80

100


(%)

Source: Fitch

Malaysian Banks: Rating

Outlooks

Related Research

2012 Outlook: Malaysian Banks (December 2011) Malaysian Banking Prudential Regulations (October 2011) Malaysian Banks: A Peer Study (April 2011) Stress Test on Malaysian Banks (August 2009)

Analysts

Alfred Chan +65 6796 7220 [email protected] Mikho Irawady +65 6796 7230 [email protected]

Rating Outlook

SS TT AA BB LL EE


Malaysia C1

Steady credit profiles amid growing external uncertainties.

High household debt a potential concern if unemployment rates rise unexpectedly.







Banks


January 2012 15

Figure 48 Figure 49

0.0

0.3

0.6

0.9

1.2

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

ROA (LHS) ROE (RHS)

Malaysia: Key Performance TrendsReturn on assets and return on equity

(%)

Source: Fitch, BNM, banks

(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0.0

0.3

0.6

0.9

1.2


Malaysia: Key Performance TrendsCredit costs

(%)

Source: Fitch, BNM, banks

(%)

Figure 50 Figure 51

0

2

4

6

8

2006 2007 2008 2009 2010 2011E 2012F

(%)

Source: Fitch, BNM

Malaysia: Key Performance TrendsAsset quality - NPL ratio

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F


Source: Fitch, BNM

Malaysia: Key Performance TrendsCapital ratios

Figure 52 Figure 53

0

20

40

60

80

2006 2007 2008 2009 2010 2011E 2012F

(%)

Source: Fitch, BNM

Malaysia: Key Performance TrendsLoan/deposit ratio

0

30

60

90

120

2006 2007 2008 2009 2010 2011E 2012F

Overall Household(%)

Source: Fitch, BNM

Malaysia: Key Performance TrendsCredit/GDP ratio

Banks


January 2012 16

Mongolia

Overheating Credit Growth: Loan growth in the Mongolian banking system registered 59%

year-on-year (yoy) in H111, which far exceeded the country‟s nominal GDP growth rate of 29%

in 2011. Fitch believes that the pace of loan growth is likely to continue, as the country has

significant development potential and is attracting substantial foreign investment.

Liquidity and Capital Pressured: Although the balance of deposits is growing due to rising

household income, the system‟s loan/deposit ratio has started to increase. This implies an

increasing reliance on wholesale funding and liquidity risks if market conditions deteriorate.

Notwithstanding current capitalisation levels, Fitch believes the banks will need additional

capital to support strong loan growth as well as to absorb unexpected losses – in light of

Mongolia‟s vulnerability to external shocks.

High Profitability May Decline: As competition for both funding and new lending is

intensifying, the volume effect of loan growth may be offset by a shrinking net interest margin in

2012 and beyond. With uncertain global macroeconomic conditions, loan quality may weaken

and trigger an increase in loan-loss charges, which will erode the higher proportion of lower

pre-provision operation profit – particularly as the sector‟s reserve coverage is modest.

Large Currency Mismatch: The economy and the banking sector also remain exposed to

foreign-exchange risk, as indicated by the net open position in foreign currency to capital – and

evident from the financial crisis in 2008-2009. In the event of a sharp depreciation of the local

currency, the banking system may be exposed to higher credit risk associated with borrowers

with a local-currency income and US dollar-denominated debt.

Loose Prudential-Measures Implementation: Despite the authorities‟ measures to control

credit growth and for banks to maintain adequate capital and liquidity, Fitch believes such

efforts could be compromised by lax implementation, at least for the smaller/weaker banks.

Banks are not penalised severely if they breach prudential requirements, including breaching

liquidity-related requirements. In Fitch‟s opinion, this could leave banks with only a limited

buffer against any unexpected adverse changes in the operating environment.

Uncertain Government Support: Fitch believes that the lack of a framework ensuring

government support for Mongolia‟s banking sector (in case of need) may challenge the stability

of the system should the operating environment change suddenly.


Standalone Strength: Fitch rates two Mongolian banks – Khan Bank LLC („B‟/Positive) and

XacBank LLC („B‟/Stable). The IDRs of both are underpinned by their standalone financial

strength, as indicated by VRs at „b‟.

Maintaining higher capitalisation and/or reserve levels is essential for any upgrade. Structural

improvement or less reliance on wholesale funding would be viewed positively by Fitch.

Excessive loan growth without suitable recapitalisation, and/or a sustained deterioration in its

capitalisation due to a weakening of loan quality, could lead to negative rating action and/or a

change in Outlooks.

Figure 54

0

20

40

60

80

100


(%)

Source: Fitch

Mongolian Banks: Rating

Outlooks

Analysts

Chikako Horiuchi +81 3 3288 2972 [email protected] Jonathan Cornish +852 2263 9901 [email protected]

Analysts

Chikako Horiuchi +81 3 3288 2972 [email protected] Jonathan Cornish +852 2263 9901 [email protected]

Overheating credit growth pressuring the system‟s liquidity and profitability.

Further capitalisation necessary to support loan growth and absorb unexpected losses.

More stringent banking supervision and resolution scheme needs to be established.

Rating Outlook

SS TT AA BB LL EE


Mongolia At least 2a

a Banking system indicator is not available





Banks


January 2012 17

Figure 55 Figure 56

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011E 2012F

0

6

12

18

24

30

ROA (LHS) ROE (RHS)

Mongolia: Key Performance TrendsReturn on assets and return on equity

(%)


(%)

-10

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

-0.5

0.0

0.5

1.0

1.5

2.0



Mongolia: Key Performance TrendsCredit costs

(%)


(%)

Figure 57 Figure 58

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011E 2012F

(%)

Source: Fitch, Bank of Mongolia

Mongolia: Key Performance TrendsAsset quality - NPL ratio

0

4

8

12

16

20

2006 2007 2008 2009 2010 2011E 2012F


Source: Fitch, Bank of Mongolia, banks, IMF

Mongolia: Key Performance TrendsCapital ratios

Figure 59 Figure 60

0

40

80

120

160

2006 2007 2008 2009 2010 2011E 2012F

(%)


Mongolia: Key Performance TrendsLoan/deposit ratio

0

20

40

60

80

2006 2007 2008 2009 2010 2011E 2012F

Real GDP growth Loan growth(%)


Mongolia: Key Performance TrendsReal GDP growth and loan growth

Banks


January 2012 18

New Zealand

Higher Wholesale Funding Costs: New Zealand‟s four Australian-owned major banks source

around one quarter of their funding from offshore wholesale markets. Turmoil in European

markets curtailed access for most banks in the latter part of 2011, and Fitch expects that costs

will be higher when such access does return. At the same time, greater intensity around banks‟

deposit-gathering initiatives is also likely to place upward pressure on funding costs.

The RWN on New Zealand major banks‟ Long-Term IDRs reflects the institutional support of

their Australian parents and Fitch‟s rating action taken on 30 January 2012. The agency

believes that despite significant improvements in funding and liquidity, these banks continue to

have a weaker funding profile than other similarly highly rated global peers.

Strong Balance Sheets: Despite funding pressures, balance sheets are well placed to handle

disruption should it continue into 2012. Major banks‟ Tier 1 capital ratios are above the

proposed Basel III Tier 1 minimum of 8.5% (see Figure 65); liquid asset holdings have been

bolstered; and exposure to offshore short-term funding has come down steadily over the past

two years. The banks‟ current settings are sound, and unlikely to improve significantly in 2012.

Improving Asset Quality: Asset quality should improve slowly in 2012, benefiting from

deleveraging within the household sector and New Zealand‟s relatively large rural sector. At the

same time, asset quality should be enhanced further by improving asset values and

employment conditions, as well as tighter underwriting criteria (see Figure 64). Fitch does not

expect those loan losses which are still to emerge from the Christchurch earthquakes in 2010

and 2011 to have a major impact on banks‟ profitability.

Challenging External Environment: New Zealand has been showing signs of improvement

from the economic downturn in 2008-2009, but the Christchurch earthquakes have delayed the

recovery. Yet rebuilding efforts in the earthquake-struck region are expected to gather

momentum in mid-2012, providing a boost to the overall economy. The country should also

continue to benefit from strong demand for its “soft commodity” exports.

Earnings Constraints: There is still an air of caution despite New Zealand‟s reasonably stable

economic prospects. This will be a major factor contributing to limited balance sheet growth,

which when combined with higher funding costs will constrain banks‟ earnings growth in 2012.

Nonetheless, Fitch expects that New Zealand banks will still report healthy profitability – aided

by lower loan-impairment charges, selective asset re-pricing and tight control of costs.


Financial Market Disorder: Market disorder has the potential to disrupt wholesale funding

initiatives in 2012. While liquidity, strong deposit growth and active pre-funding in wholesale

markets provide a buffer, should there be an extended period of dislocation it would pose a

threat to the outlook.

Imprudent Growth: With credit demand forecast to be moderate in 2012, banks may be

tempted to loosen underwriting standards in the pursuit of loan growth. A substantial loosening

of standards may lead to a negative outlook.

Sharp Economic Deterioration: The negative effects of a sharp reversal in New Zealand‟s

terms of trade may flow through to the job market and bank asset quality, leading to a change

in outlook. However, Fitch does not place considerable weight on this scenario, in light of the

global demand for New Zealand‟s soft commodity goods.

Figure 61

020406080

100

Positive

Outlook/

Watch

Stable

Outlook

Negative

Outlook/

Watch

(%)

Source: Fitch

New Zealand Banks:

Rating Outlooks/Watches

Improving credit profile, but challenges remain.

Healthy financial strength, with improved funding and liquidity positions and strong capitalisation.

Slow growth of balance sheets despite an improving environment.

Analysts

Andrea Jaehne +61 2 8256 0343 [email protected] John Miles +61 2 8256 0344 [email protected]

Rating Outlook

NN EE GG AA TT II VV EE

Banking Systemic Risk Indicator New Zealand B2



Banks


January 2012 19

Figure 62 Figure 63

0.0

0.4

0.8

1.2

1.6

2006 2007 2008 2009 2010 2011 2012F

0

5

10

15

20

ROA (LHS) ROE (RHS)

New Zealand: Key Performance


(%)

Source: Reserve Bank of New Zealand (RBNZ)

(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011 2012F

0.0

0.2

0.4

0.6

0.8




TrendsCredit costs

(%)

Source: RBNZ

(%)

Figure 64 Figure 65

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008 2009 2010 2011 2012F

(%)

Source: RBNZ



0

3

6

9

12

15

2006 2007 2008 2009 2010 2011 2012F


Source: RBNZ



Figure 66 Figure 67

04080

120160200

2007 2008 2009 2010 2011 2012F

(%)

ª Based on 7 banks: ASB, BNZ, ANZ National, TSB

Bank, Westpac New Zealand, SBS Bank and

Kiwibank

Source: Banks


TrendsLoan/deposit ratioª

-4

-2

0

2

4

2006 2007 2008 2009 2010 2011 2012F

-16

-8

0

8

16


Loan growth (RHS)


TrendsReal GDP growth and loan growth

(%)

Source: RBNZ

(%)

Banks


January 2012 20

Philippines

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.


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


(%)

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)

Analysts


Rating Outlook

SS TT AA BB LL EE


Philippines D1

Reasonably buffered against structural risks.






Banks


January 2012 21

Figure 69 Figure 70

0.0

0.4

0.8

1.2

1.6

2006 2007 2008 2009 2010 2011E2012F

0

4

8

12

16

ROA (LHS) ROE (RHS)

Philippines: Key Performance


(%)

Source: Fitch, BSP, banks

(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0.0

0.4

0.8

1.2

1.6




TrendsCredit costs

(%)


(%)

Figure 71 Figure 72

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F

(%)

ª NPA comprises NPLs and foreclosed properties

Source: Fitch, BSP


TrendsAsset quality - NPA ratioª

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F





Figure 73 Figure 74

0

20

40

60

80

2006 2007 2008 2009 2010 2011E 2012F

(%)




0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011E 2012F

NPLs Foreclosed properties Composite(%)



TrendsReserve coverage ratios

Banks


January 2012 22

Singapore

Strengths Amid External Challenges: Fitch believes Singapore banks should be able to keep

their credit profiles intact, even as the odds increase of a fresh global downturn scenario. Such

resilience stems from the banks‟ strong, liquid balance sheets, reasonably diversified loan

books and satisfactory risk management, and the government‟s fiscal capacity to introduce

counter-cyclical measures to protect the domestic economy, if necessary.

Earnings Could Moderate: While revenues are broad-based, profitability could ease in 2012

due to tight margins, volatile trading conditions and rising credit costs. While the direct impact

from the sovereign crisis in Europe may not be significant, Fitch does not rule out downward

pressure on its 2.5% 2012 GDP growth forecast for Singapore – as well as those for Hong

Kong, Malaysia, Indonesia and Thailand where Singapore banks have significant operations.

Economic Vulnerability: The Singapore economy is among those at risk of a renewed

recession due to its small size and high degree of openness. In such an event, weaker global

trade will hit the manufacturing, general commerce and transportation sectors, especially

export-led businesses. However, Fitch assesses loans to these industries – at about 30% of

the banks‟ loans – as diversified, with a reasonable delinquency record through credit cycles.

Significant Property Loans: Larger exposure is to the broad real estate segment – at close to

40% of loans – of which two-thirds are mortgages and the rest to property developers and

investors. Fitch expects a low asset-quality threat from mortgages, with job losses likely to rise

only modestly and interest rates staying low. Many developers and investors have healthy

leverage, with sharp delinquencies likely to surface only in a prolonged property sector trough.

Macro-Prudential Indicator: Fitch revised Singapore‟s MPI to „2‟ from „1‟ in December 2011

as real credit growth outpaced GDP growth by an estimated 19% in 2011 (2010: 10%), which

suggests a modest potential systemic stress risk on the banking sector. The rapid loan growth

was partly accounted for by loans to Chinese corporations, but outstanding loans to China are

still modest relative to the local banks‟ balance sheets. Furthermore, maturities are mostly short

term, with the risk of credit losses largely mitigated by cash collateral and bank guarantees.

Strong Loss-Absorption: Singapore banks‟ capital – a historical rating strength – underpins

their loss-absorption ability. Fitch expects the banks to remain well-capitalised owing to their

conservative record and the prudent regulatory environment. Their core Tier 1 CAR (without

hybrids) was high at end-September 2011, at an average 11%, and should surpass the Basel

III minimums set by the Monetary Authority of Singapore.

Stable Funding and Liquidity: The domestic deposit franchise supports funding profiles, and

mitigates wholesale funding needs. The banks have relied mainly on Singapore dollar deposits

to fund US dollar loan growth, with FX gaps closed via currency swaps, although this has

resulted in loan/deposit ratios increasing to about 90% at end-2011 from 82% at end-2010 (see

Figure 80). Fitch believes that the tight US dollar liquidity needs to be monitored for funding

risks, as the loan/deposit ratios for all three banks‟ US dollar books exceed 100%.


A Prolonged Downturn: Downside rating risks could result from a fresh recession, particularly

if sharp and sustained – and which results in significant capital impairment risk. However, Fitch

views this likelihood as low, in view of the banks‟ solid loss-absorption qualities.

Overseas Expansion: There could be downward rating implications due to “event risk”,

aggressive expansion into less-developed markets with legal and/or regulatory concerns, and a

concurrent reduction in core capitalisation. Such prospects are also low at this stage, as Fitch

assesses management as generally conservative and mindful of such risks – as also

demonstrated by their track record.

Figure 75

0

20

40

60

80

100


(%)

Source: Fitch

Singapore Banks: Rating

Outlooks

Related Research

Singapore Banks: Annual Review and Outlook for 2011 (March 2011) Singapore Banks‟ H111 Review and Outlook (August 2011) Macro-Prudential Risk Monitor (December 2011) 2012 Outlook: Singapore Banks (December 2011)

Analysts


Resilient as global uncertainties persist.

Rating Outlook

SS TT AA BB LL EE


Singapore B2









Banks


January 2012 23

Figure 76 Figure 77

0.0

0.4

0.8

1.2

1.6

2006 2007 2008 2009 2010 2011E2012F

0

4

8

12

16

ROA (LHS) ROE (RHS)

Singapore: Key Performance


(%)


(%)

0

10

20

30

40

2006 2007 2008 2009 2010 2011E2012F

0.0

0.3

0.6

0.9

1.2




TrendsCredit costs

(%)


(%)

Figure 78 Figure 79

0

1

2

3

4

2006 2007 2008 2009 2010 2011E 2012F

(%)

ª NPAs comprise NPLs, debt securities +

contingencies



TrendsAsset quality - NPA ratioª

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F





Figure 80 Figure 81

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011E 2012F

(%)




-3

0

3

6

9

12

15

2006 2007 2008 2009 2010 2011E2012F

-6

0

6

12

18

24

30


Real loan growth (RHS)


TrendsGDP growth and real loan growth

(%)


(%)

Banks


January 2012 24

South Korea

Weaker Performance in 2012: Fitch forecasts the performance of the commercial banks to be

weaker than in 2011 (see Figure 83). Underlying profitability should weaken due to competition,

the social/political pressure to lower fees, and an increase in credit costs. Margins should

narrow because of the cuts in lending rates initiated by Industrial Bank of Korea (IBK,

„A+‟/Positive), the policy bank focusing on SME lending, which anticipates a 2012 profit decline

of about 20%. That said, Fitch does not expect competition to be too aggressive.

Greater Interest Income Dependency: Fitch expects profit structures to become more

interest-income dependent than in the past decade after the planned sale of the lenders‟ stake

in Hynix Semiconductor Inc. („BB−‟/RWN) in March 2012. The system has made large gains

from the sale of equity stakes in companies gained through debt-for-equity swaps after the

Asian Crisis (eg KRW3.2trn in 2011 and about KRW1.1trn in 2012).

Mortgage Borrowers’ Class Actions: Following the Supreme Court‟s decision in August 2011

that fees related to mortgages should be born by the lender, some households are taking class

action – seeking reimbursement of fees (about 60bp of the loan amount). Fitch estimates the

contingent liability to be about KRW5trn (about 40bp of the average assets of the commercial

banks) if the court sides with the borrowers and the reimbursement claims become prevalent.

Moderate Increase in Loans: Fitch anticipates the commercial banks‟ risk-appetite for lending

to remain weak; continuing to focus on mortgage lending, high-quality SMEs (generally large

ones and small-office-home-offices), and large corporates. Expecting a significant economic

slowdown in 2012, policy financial institutions like IBK have planned to increase their lending to

the weak SMEs that are shunned by the commercial banks. Fitch forecasts overall loan growth

to continue to be lower than the nominal GDP rate (see Figure 88).

Rise in Corporate Delinquencies: Credit costs are likely to increase, but should be

manageable unless the banks experience substantial unexpected losses from the failure of

large companies – especially in weak sectors like shipbuilding, property development and

shipping, and from the aforementioned mortgage borrowers‟ claims. Fitch notes a rising trend

since 2008 in the delinquency rate of large corporate loans, and believes that a greater number

of marginal large businesses will fail if the economic slowdown is prolonged.

Challenges in Funding: A considerable amount of foreign-currency debt (about USD25bn) is

maturing in 2012. If the capital market volatility persists, the banks would again face significant

difficulties. That said, Fitch notes that the banks have been very active in refinancing foreign-

currency funds since 2011; investor confidence in the system is noticeably stronger now than in

2008; and some of South Korea‟s large foreign-currency reserves would again be available to

the banks. Fitch expects no significant change in the loan/deposit ratio.

Strong Capitalisation Maintained: Fitch anticipates commercial banks‟ capitalisation to

remain strong, with a Tier 1 capital ratio of 11%. The agency estimates there to have been

some decline by end-2011 due to the early repayment of hybrid capital, which some banks had

received from the government-backed Bank Recapitalisation Fund in March 2009.


Positive Rating Triggers: Any upside potential is likely to be limited to the five policy banks

whose ratings are driven by government support and on Positive Outlook. Fitch does not

expect any structural improvement in the commercial banks‟ standalone VRs to be sufficiently

significant to merit an upgrade in 2012.

Negative Rating Triggers: Downside risk for the commercial banks‟ VRs may arise from any

unexpected significant increase in credit costs, deterioration in profitability, or weakening of

capitalisation (as in more aggressive credit growth or risk tolerance).

Figure 82

0

20

40

60

80

100


(%)

Source: Fitch

South Korea's Banks:

Rating Outlooks

Weakening profitability.

Large corporate delinquencies on the rise.

Manageable credit costs.

Challenges in foreign-currency funding.

Strong capitalisation maintained.

Rating Outlook

SS TT AA BB LL EE


South Korea C1

Related Research

Fitch Revises Outlooks of Korea‟s 5 Policy FIs (December 2011) Korea (November 2011) Challenges Facing Korea‟s Banks (June 2011)

Analysts

Heakyu Chang +822 3278 8363 [email protected] Mihwa Park +822 3278 8372 [email protected]







Banks


January 2012 25

Figure 83 Figure 84

0.0

0.3

0.6

0.9

1.2

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

ROA (LHS) ROE (RHS)

South Korea: Key Performance

TrendsReturn on assets and return on equityª

(%)

ª IFRS in 2011 and 2012

Source: Fitch,Financial Supervisory Service

(FSS),banks

(%)

0

15

30

45

60

2006 2007 2008 2009 2010 2011E2012F

0.0

0.3

0.6

0.9

1.2




TrendsCredit costs % PPOP and loansª

(%)


Source: Fitch, FSS, banks

(%)

Figure 85 Figure 86

0.0

0.4

0.8

1.2

1.6

2.0

2006 2007 2008 2009 2010 2011E 2012F

(%)




0

3

6

9

12

15

2006 2007 2008 2009 2010 2011E 2012F





TrendsCapital ratiosª

Figure 87 Figure 88

0

30

60

90

120

150

2006 2007 2008 2009 2010 2011E 2012F

(%)

ª Including loans to and deposits from banks



TrendsLoan/deposit ratioª

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F

Nominal GDP growth Loan growth(%)



TrendsNominal GDP growth and loan growth

Banks


January 2012 26

Sri Lanka

Brighter Prospects: The outlook on the National Long-Term Ratings of most Sri Lankan

banks is stable. Growth in the domestic economy since the end of Sri Lanka‟s civil war in May

2009 has improved the earnings prospects of banks, and the government‟s capacity to support

the banking system has improved slightly. However, the rapid pace of loan growth that began

in mid-2010, if continued, will test banks‟ risk management systems and funding profiles.

Rapid Credit Growth: Fitch expects the performance of Sri Lankan banks to continue to

benefit from strong domestic demand. The agency forecasts real GDP to rise by 8% in 2012.

Fitch notes that banks are the dominant intermediaries in the system, and the level of credit

penetration remains low.

In December 2011, Sri Lanka‟s MPI – an indicator of potential stress in the banking system –

was revised to „3‟ (high) from „1‟ (low). The MPI identifies the build-up of potential stress in

banking systems due to rapid credit growth associated with bubbles in housing or equity

markets or real exchange rates which have appreciated. Credit growth in Sri Lanka in 2010 and

2011 has been amongst the highest in emerging markets; and together with an increase in

equity prices, has triggered the increase in the MPI.

Manageable Asset Quality: Fitch remains concerned about the Sri Lankan system‟s ability to

manage sustained loan expansion above the historical average that could push up system

NPLs. Asset quality could be affected by the knock-on effects of a global economic

environment which is still uncertain. Fitch believes that asset quality may not deteriorate

immediately to the levels reached in 2008 and 2009; but the agency does, however, recognise

the need for banks to enhance loss-absorption capacity by increasing Tier 1 capital.

Sustained Healthy Profitability: Fitch expects strong loan demand, manageable credit costs

and reduced effective taxes to offset competitive pressure on net interest margins and

potentially higher operating costs, supporting healthy profitability (see Figure 90).

Increased Non-Deposit Funding: Continued strong loan expansion that outstrips the rise in

deposits is likely to stretch the Sri Lankan banking system‟s loan/deposit ratio further (see

Figure 94). Fitch expects deposits to remain the main source of funding for Sri Lankan banks,

supported by their domestic franchises, although increased non-deposit funding may be

needed to support lending.

Strain on Capitalisation: Fitch expects capital ratios to come under pressure (see Figure 93),

as loans are likely to increase at a faster pace than internal capital generation. Fitch feels that

capital conservation is needed to support capitalisation – to ensure that an adequate buffer is

maintained in light of loan growth levels, credit concentrations, the level of loan-loss reserve

coverage and exposure to macroeconomic volatilities.


Negative Rating Triggers: A significant reversal of policy direction and/or macroeconomic

shocks – and/or rapid lending that puts pressure on liquidity, earnings or asset quality resulting

in substantial capital impairment – could be negative for the outlooks and/or ratings of Sri

Lankan banks.

Positive Rating Triggers: Structural changes – such as improvements to risk management

and enhanced capital buffers – could be positive for the outlooks and/or ratings of Sri Lankan

banks.

Figure 89

0

20

40

60

80

100


(%)

Note: Based on National Ratings

Source: Fitch

Sri Lanka Banks: Rating

Outlooks

Rating Outlook

SS TT AA BB LL EE


Sri Lanka 3a

a Banking system indicator is not available

Related Research

2012 Outlook: Sri Lankan Banks (January 2012)

Analysts

Rukshana Thalgodapitiya +94112541900 [email protected] Ramali Perera +94 11 254 1900 [email protected] Ananda Bhoumik +91 22 4000 1720 [email protected]

Better economic conditions support banks‟ performance.

Managing rapid credit growth a potential challenge.






Banks


January 2012 27

Figure 90 Figure 91

0.0

0.4

0.8

1.2

1.6

2.0

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

25

ROA (LHS) ROE (RHS)

Sri Lanka: Key Performance


(%)

Source: Fitch, 12 local banks rated by Fitch

(%)

0

6

12

18

24

30

2006 2007 2008 2009 2010 2011E2012F

0.0

0.2

0.4

0.6

0.8

1.0




TrendsCredit costs

(%)


(%)

Figure 92 Figure 93

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011E 2012F

(%)




0

4

8

12

16

20

2006 2007 2008 2009 2010 2011E 2012F


Source: Central Bank of Sri Lanka (CBSL), Fitch



Figure 94 Figure 95

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011E 2012F

(%)




-10

0

10

20

30

40

2006 2007 2008 2009 2010 2011E 2012F


Source: CBSL, Fitch


TrendsNominal GDP growth and loan growth

Banks


January 2012 28

Taiwan

Stable Credit Profiles: The ratings of the Taiwanese banks assessed by Fitch are

underpinned by strengthened loan-loss provisions and a low-to-moderate level of risk-taking in

loan growth, as well as generally improved capitalisation during 2009-2011. Selected state

banks are less well capitalised, and need to replenish their capital; otherwise, their VRs will be

challenged as they are most likely to be influenced by government polices to support financially

weak corporate credits amid a likely cyclical economic downturn.

Credit Risks To Increase: Fitch expects credit costs to rise after a benign domestic credit

environment during 2009-2011. The softening property market has increased potential credit

losses in real estate-related lending. The risk of lumpy credit losses could arise from

concentrated credit exposure to large industrial companies in some consumer electronics

supply chains which are experiencing intensifying competition and challenges in innovation.

Provisions Strengthened: Banks stepped up provisioning in 2010-2011 to meet the regulatory

demand for general provisions (GP) at 0.5% of performing loans, effective from 2011, which is

likely to be raised to 1%. Fitch takes a positive view on the tougher provisioning rule to prepare

banks for unexpected credit losses. The agency estimates that system-wide GP/performing

loans would have risen to about 0.8% at end-2011, much higher than 0.2% at end-2009, while

NPLs (90 days past due) would have been below 0.5% of total loans and were well provisioned.

Capital for Moderate Stress: Taiwanese banks are generally reasonably capitalised (with a

system-wide core Tier 1 capital ratio estimated at 9.5% at end-2011) to withstand a moderate

stress of 80bp (of assets) in credit cost. This would be well above the 10bp-32bp credit cost in

2009-2011, but substantially lower than the historical peak of near 200bp experienced in the

early 2000s. Maintenance of adequate loss-absorption buffers in capital and loan-loss

provisions are vital, as most banks are weak in internal capital generation.

Liquid and Deposit-Funded: Liquidity is likely to remain ample in Taiwan‟s banking system in

2012, underpinned by a record funding surplus (deposits exceeding loans) and investment in

central bank paper. Basel III‟s liquidity standards may induce some banks to lengthen their

funding tenor profile, but is unlikely to alter the overall funding structure to any extent – given

the availability of the system‟s stable retail deposit base.

Lower Profit Forecast: Fitch believes it is unlikely that the benign credit costs of 2009-2011

will continue throughout 2012 – against the weakened growth prospects of the global economy

and the consequent slowdown of Taiwan‟s important export sectors. Revenue growth should

be limited by weak demand for credit, soft pricing in a likely protracted period of low interest

rates, and fragile investment market sentiment. Fitch predicts banks‟ profitability and earnings

to fall moderately in 2012.


Negative Rating Triggers: Excessive growth is ratings negative, particularly that driven by

unrestrained ventures into unfamiliar overseas markets. A disruptive slowdown in the Chinese

economy will pressure Taiwanese banks‟ asset quality through increasingly close trade flows

and credits mobilised by Taiwanese corporations for use in mainland China. Downward rating

pressure may also emerge from weakened credit standards for growth and corporate credit

events that would dilute a bank‟s loss-absorption capacity to a meaningful extent.

Positive Rating Triggers: Fitch sees limited upside to Taiwanese banks‟ ratings, reflecting

their lack of pricing power as well as weak internal capital generation and relatively modest

capital profiles by international standards. Niche and profitable business models, managed with

firm asset quality, is ratings positive, but often difficult to achieve in this market.

Figure 96

0

20

40

60

80

100


(%)

Source: Fitch

Taiwanese Banks: Rating

Outlooks

Enhanced loan-loss provisions and capitalisation enable banks to withstand a moderate level of stress.

Concentrated tech exposure following a major credit risk.

Related Research

Taiwanese Banks‟ Exposure to Technology Industry: Display Panel Makers a Risk (August 2011) Outlook: Taiwanese Banks (April 2011)

Analysts

Jonathan Lee +886 2 8175 7601 [email protected] Sophia Chen, CFA, CPA +886 2 8175 7604 [email protected] Cherry Huang, CFA +886 2 8175 7603 [email protected]

Rating Outlook

SS TT AA BB LL EE

Banking Systemic Risk Indicator Taiwan C1








Banks


January 2012 29

Figure 97 Figure 98

-0.5

0.0

0.5

1.0

1.5

2006 2007 2008 2009 2010 2011E2012F

-3

0

3

6

9

ROA (LHS) ROE (RHS)

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


Source: Fitch, CBC

Taiwan: Key Performance TrendsCapital ratios


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


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.


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


(%)

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)

Analysts

Patchara Sarayudh +66 2655 4755 [email protected] Wasant Polcharoen +66 2655 4758 [email protected] Narumol Charnchanavivat +66 2655 4763 [email protected]







Banks


January 2012 31


0.0

0.5

1.0

1.5

2.0

2006 2007 2008 2009 2010 2011E2012F

0

4

8

12

16

ROA (LHS) ROE (RHS)

Thailand: Key Performance TrendsReturn on assets and return on equity

(%)


(%)

0

20

40

60

80

2006 2007 2008 2009 2010 2011E2012F

0.0

0.5

1.0

1.5

2.0



Thailand: Key Performance TrendsCredit costs

(%)


(%)


0

2

4

6

8

10

2006 2007 2008 2009 2010 2011E 2012F

(%)


Thailand: Key Performance TrendsAsset quality - NPL ratio

0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F



Thailand: Key Performance TrendsCapital ratios


0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011E 2012F

(%)


Thailand: Key Performance TrendsLoan/deposit ratio

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011E 2012F

(%)


Thailand: Key Performance TrendsNPL reserve coverage ratio

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.


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


(%)

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)

Analysts

Mikho Irawady +65 6796 7230 [email protected] Alfred Chan +65 6796 7220 [email protected]

Difficult operating environment to continue into 2012.





Banks


January 2012 33


0.0

0.3

0.6

0.9

1.2

2006 2007 2008 2009 2010 2011E2012F

0

5

10

15

20

ROA (LHS) ROE (RHS)

Vietnam: Key Performance TrendsReturn on assets and return on equity

(%)


(%)

0

15

30

45

60

2006 2007 2008 2009 2010 2011E2012F

0.0

0.5

1.0

1.5

2.0

2.5



Vietnam: Key Performance TrendsCredit costs

(%)


(%)


0

5

10

15

20

2006 2007 2008 2009 2010 2011E 2012F

VAS IFRS (Fitch estimates)(%)


Vietnam: Key Performance TrendsAsset Quality - NPL ratio

0

3

6

9

12

2006 2007 2008 2009 2010 2011E 2012F



Vietnam: Key Performance TrendsCapital ratios


0

25

50

75

100

125

2006 2007 2008 2009 2010 2011E 2012F

(%)


Vietnam: Key Performance TrendsLoan/deposit ratio

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011E 2012F



Vietnam: Key Performance TrendsNominal GDP growth and loan growth

Banks


January 2012 34

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Related Criteria

National Ratings Criteria (January 2011)

Global Financial Institutions Rating Criteria (August 2011)

Country Ceilings (August 2011)

Rating Financial Institutions Above the Local Currency Sovereign Rating (December 2011)

http://www.fitchratings.com/creditdesk/public/ratings_defintions/index.cfm?rd_file=intro#lmt_usage










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