Rising leverage poses rating risks for Asia-Pacific banks

High or rapidly increasing leverage, together with mounting exposure to China, will constrain upward rating momentum for banks in Asia-Pacific (APAC). It could even lead to downgrades should China's economy slow more sharply than expected and weaknesses in its banking system become more widespread.

Fitch estimates that private sector credit in APAC will reach 148% of GDP by end-2012, approaching the peak of 150% in 1998-1999. The credit/GDP ratio is converging for Asian emerging markets (143%) and Asian developed
markets (156%), marking a high for the former.

Within emerging markets, leverage trends are mixed. Vietnam's credit/GDP ratio has more than doubled since 1997, while Indonesia, Thailand, the Philippines and Malaysia have deleveraged substantially.

Fitch expects leverage in China will continue to rise as credit is employed to underpin the economy. Strong credit growth in China, and to a lesser extent India and South Korea, has driven the region's higher leverage.

China-related growth also boosts Hong Kong's credit/GDP ratio, which is the highest in the region, forecast at 229% by end-2012.

Relaxed underwriting standards, inadequate controls, property speculation and unproductive investments are likely to lead to a rise in bad debt, as Fitch has doubts over whether current credit and economic growth in APAC can be sustained.

APAC countries in the highest 'MPI-3' category of Fitch's macro prudential risk indicators (MPI) represent 43% of Fitch's forecast 2012 GDP for the region, with China accounting for 38%. The MPI measures the build up of risk within financial systems with ‘3’ defined at a high vulnerability to potential systemic stress.

There are currently 5 countries that have a '3' - China, Hong Kong, Mongolia, Indonesia and Sri Lanka.

Fitch expects economic growth in APAC to moderate in 2013-2014, due to global uncertainty which should lead to lower credit growth and in turn help to unwind risks built up from the post-2007 growth phase. Asian countries are also wealthier than in 1997 when the Asian crisis hit, placing the region in a stronger position to counter potential stresses.