Moody’s assesses exposures of Asia Pacific banks to euro area crisis

Monday, 13 February 2012 00:00 - - {{hitsCtrl.values.hits}}

Moody’s Investors Service says that while banking systems in the Asia Pacific region are expected to remain generally resilient, Australia, New Zealand, Korea, and Vietnam are most exposed in the event that the euro area crisis continued to deteriorate.

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While these systems appear less exposed than they were at the time of the Lehman shock, Moody’s assesses them as more vulnerable to the first-round impact of a further worsening of the euro area crisis than other systems in Asia Pacific,” says Stephen Long, a Moody’s Managing Director for the Financial Institutions Group in Asia Pacific.

“Our base case is that the resilience of banks in the Asia Pacific will generally persist. However, the risks to that scenario have increased, warranting a closer examination of how banks could be affected under more adverse scenarios,” he adds.

Long was speaking at the release of a report that assesses the exposure of Asia Pacific banks to the euro area crisis.

The sovereign crisis in the euro area has increased the threat of a contagion in Asia and is the greatest risk to the generally robust credit profiles of Asia Pacific banks. Since the second half of 2011, there has been a broad slowdown in Asian exports, general weaknesses in Asian currencies that have reversed their earlier strengths, and increasing anecdotal evidence of European banks selling their portfolios of Asian loan books.

Moody’s classifies the 16 banking systems in Asia into three categories, in terms of their exposure to extreme distress in the euro area: More Exposed, Exposed, and Less Exposed.

The classification is based on Moody’s assessment in five main areas: (1) a banking system’s dependence on external funding; (2) the significance of euro area banks in individual banking systems; (3) a country’s economic dependence on exports; (4) the overall challenges faced by the banking system; and (5) the ability of a government to support the country’s banks, if needed.

According to the report, the banking systems in Australia and New Zealand are exposed to high refinancing risks, as well as potential spikes in borrowing and hedging costs.

“The proportion of external funding in total funding is 19% for Australia and 16% for New Zealand, and which are among the highest levels in Asia. This exposes banks in both systems to increased funding costs and refinancing risks in the event of wholesale funding market stress,” Long says.

Korea has a very high foreign currency loan-to-deposit ratio of 328%, and the proportion of external market funding accounts for 9% of its total funding. Moreover, its economic dependence on exports is strong.

On the other hand, Vietnam’s economy is not very diverse, its financial system is weak, and its corporate sector is dependent on low-cost US dollar loans, thereby exposing the system to any sudden tightening in foreign currency liquidity.

Moody’s also classifies ten banking systems in the “Exposed” category: Cambodia, China, Hong Kong, India, Japan, Malaysia, Mongolia, Singapore, Taiwan, and Thailand. Those in the “Less Exposed” category are Indonesia and the Philippines.

The report is titled “Assessing the Exposure of Asia Pacific Banks to the Risk of Deterioration in the Euro Area”. It can be found at www.moodys.com.