APAC banks to account for 60% of global credit losses over 2020-2021

Credit losses are likely to peak by end-2021 and recover by 2023.

Risks incurred by Asia Pacific’s top banks are rising with the region’s GDP trends now likely to only normalise by 2023 at the earliest, reports S&P Global Ratings.

A total of $2.7t of economic output will be lost in APAC over 2020 and 2021. In particular, APAC banks will account for about 60% of credit losses globally during this period, according to S&P.

As lenders’ health are clearly linked to the region’s economic health, the loss is expected to gravely hit banks’ performance in the region. S&P said that it has taken negative ratings action in 50 APAC-based lenders and finance companies in Q2. Of these, 23 are amongst the top 60 banks in the region.

More banks are expected to be downgraded in the coming quarters.

“The extent of defaults from borrowers, and banks' credit losses, will become clearer when governments unwind fiscal support and banks end their loan repayment moratoriums. We expect most institutions in the region will show a multifold rise in credit losses and a sharp drop in earnings in the next two to three years due to the COVID-19 induced economic downturn,” the report stated.

S&P added that contracting economies, rising unemployment, and depressed consumer and business sentiment in the wake of the coronavirus outbreak will drive a multifold increase in credit losses in most APAC nations. As a result, countries' credit losses are now assumed to peak by the end of 2021 and normalise by 2023 as economies recover.

In the best-case scenario, most APAC banks will absorb the hits from the COVID-19 pandemic and start to recover by end-2021. However, a more severe or prolonged hit to the economies than the baseline would certainly push banks' credit losses higher, drive their earnings lower, and amplify other risks.

High private sector indebtedness and still high asset prices in many countries may have also set up some countries for a disorderly correction.

The outbreak has permanently reduced the region’s economy by 2-3%, noted S&P.

Amongst sovereigns, S&P identified Australia, India, Indonesia, Japan, Malaysia, New Zealand, and Thailand as having a negative outlook.