SL and Indian banks hardest hit in Asia by COVID-19: Moody’s

• Says bank credit metrics in SL likely to decline on pre-existing weaknesses and virus impact by 2022 
• Tangible Common Equity rations in SL, India and Thailand to plunge by more than 200 basis points  
• Asset quality and profitability will deteriorate significantly, but impact on capital will be limited in most key Asian banks 

Moody’s Investors Service releasing a new report yesterday warned that Sri Lanka and Indian banks will see their credit metrics deteriorate the worst due to a mix of COVID-19 impact and pre-existing issues including bad loans, low profits and declining interest rates by 2022.

However the report also said despite substantial risks, Asia-Pacific banks’ creditworthiness should remain largely intact through the current economic downturn.

“We expect asset quality to deteriorate significantly as economic conditions remain weak, while profitability will take a hit from rising credit costs and declining margins,” says Moody’s Vice President and Senior Credit Officer Eugene Tarzimanov.

Moody’s expects problem loans will double on average across the 14 APAC economies by 2022, with banks in India and Thailand to see the largest increases due to the severity of the economic shocks, and the historically poor performance of certain loan types.Changes in capital ratios will vary significantly among individual banks. Tangible Common Equity (TCE) ratios at the majority of rated banks in India, Thailand and Sri Lanka will plunge by more than 200 basis points by 2022, while in other economies, the proportion of such weak performers will range from 10% to 30% of rated banks, the report said. In Malaysia, no bank will lose more than 100 basis points of TCE.

Meanwhile, rising credit costs and a 5-10% drop in pre-provision income amid falling interest rates will drive a significant deterioration in profitability in coming years.

“In line with weak operating conditions, we expect capital ratios will decline at 78% of the 218 rated APAC banks by the end of 2022 from the end of 2019,” adds Tarzimanov. “However, the decline at most rated banks will not be significant enough to prompt a change in our views on fundamental creditworthiness, which also take into account other factors such as profitability, asset quality, funding and liquidity.

“Asset quality will deteriorate significantly as economic conditions remain weak. Based on our financial and econometric models, we project that problem loans (NPLs) will double on average across the 14 APAC economies by 2022. Banks in India and Thailand will see the largest increases in NPLs due to the greater severity of economic shocks to their economies and the historically poor performance of certain loan types.” Banks’ profitability will take a hit from increases in credit costs and contraction of margins, the report added. “While credit costs will increase as asset quality deteriorates, we estimate pre-provision income will decline 5-10% in 2020 from 2019 due to falls in interest rates across APAC and a flattening of yield curves. As a result, banks’ profitability, as measured by return on tangible assets (ROTAs), will deteriorate significantly across APAC in the coming years.

“Capital ratios will decline modestly at most rated APAC banks by 2022, with little impact on the strength of their credit profiles. We estimate that core capital, as measured by tangible common equity (TCE) as a percentage of risk-weighted assets (RWAs), will decline at 78% of the 218 banks in APAC by the end of 2022 from the end of 2019. However, declines in capital at most rated banks will not be significant enough to prompt us to change our views on their fundamental creditworthiness, which also take into account other factors of solvency and liquidity.”

Government measures to support borrowers will provide limited capital relief for banks. In some economies, government guarantees and other support schemes will curb build-ups in Non-Performing Loans (NPLs). Among other measures, government guarantees for SME loans are a key part of efforts to protect jobs and ultimately public consumption. However, they will provide a limited boost to capital for banks in APAC.