China, Imminent Interest Rate Hike Will Pressure Banking Sector In 2016, Says Fitch

By Samantha Tan BEIJING, Dec 16 (Bernama) -- Banking sectors within the Asia Pacific (APAC) region are likely to face a more challenging year ahead as financial systems adjust to slowing growth in China and the prospects of higher US interest rates, according to Fitch Ratings' 2016. It said earnings and capital buffers built up in recent years meant that most banking systems started from a position of strength going into this weaker economic backdrop. The exceptions are the large markets of China and India, and the frontier markets of Mongolia and Vietnam, although the outlook for banks in India and Vietnam was balanced by a more favourable economic environment, it said in an outlook report Wednesday. Fitch said it had a higher proportion of banking systems on negative sector outlook for next year than was the case in 2015. This was driven by the prospects of deteriorating asset quality, a more cautious risk appetite from most banks contributing to weaker credit growth, and margin pressures, all of which were likely to lead to slower profit growth, it added. Fitch viewed lower credit growth as a positive development from the perspective of financial sector stability. With respect to ratings outlook, Fitch said it had a stable outlook on the overwhelming majority except Mongolia and the Philippines (negative and positive, respectively). The predominantly outlook reflected two factors, firstly there was some tolerance in the ratings to slowing growth, given the buffers and secondly, the rating outlooks reflected sovereign support in the cases where the viability ratings were lower than issuer default ratings. Support from the authorities still mattered in the Asia Pacific region, the report added. Fitch also said, the key downside risks were Chinese growth and US interest rates, as rapid credit growth and the accumulation of high private-sector debt since 2008 has made some countries across the region sensitive to a major change in economic conditions. Fitch expected Chinese Gross Development Product growth to slow to 6.3 per cent next year and six per cent in 2017, and for US interest rates to rise gradually in 2016. However, a more severe China slowdown and/or a sharper-than-expected increase in US rates could lead to greater economic headwinds, weaker APAC currencies, and possibly higher domestic interest rates - raising the cost of debt servicing, it added. For Chinese banks, this would compound asset-quality and earnings pressures which was already mounting. For the rest of APAC, the more open economies such as Japan, Singapore, Hong Kong, Korea and Taiwan would be affected, especially those financial systems with the largest direct exposure to China (Singapore, Hong Kong and Taiwan), while further weakness in commodity prices would also be likely - exposing Indonesia, Malaysia and Australia. On a positive note, Fitch sees capital levels improving as global regulatory pressures begin to influence capital trends across the region, with Australian banks continuing to lead the market. --BERNAMA