SINGAPORE: Moody’s Investors Service has revised to stable from negative its outlook for banks in Asia Pacific as banking risks in the region are stabilising due to stable or improved operating conditions.

“Asset quality is stabilising in most banking systems, as the negative credit cycle in many of these systems has proven to be shallow with a moderate economic upturn now evident in APAC, while commodities prices are relatively stable,” said Stephen Long, Moody’s Managing Director for Financial Institutions in the region.

Moody’s conclusions are contained in its mid-year update of its annual outlook on banks in APAC, “Banks — Asia Pacific, Stabilising credit cycle”, published on 3 July 2017.

The industry outlook indicates the rating agency’s forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of the banking industry over the next 12-18 months.

“A total of 77 per cent of bank rating outlooks in APAC are now stable, up from 64 per cent at end-2016, while banks in China, Hong Kong, Singapore, Australia, New Zealand and Mongolia are mostly behind the increase in stable outlooks, following rating downgrades in some cases,” added Long.

Moody’s further believes that commodity-related problem loans have mostly peaked and the rating agency’s expectation of relatively stable energy and other commodity prices in 2017 should support bank asset quality in this segment.

Moreover, capitalisation and profitability show good levels against risk, while capital buffers are generally higher due to moderating growth in risk weighted assets and more stringent regulatory requirements. Profitability will recover in many markets because of lower credit costs and stable to higher net interest margins.

Funding and liquidity will also remain a credit strength, and most APAC banks are mostly deposit funded with a moderate reliance on wholesale sources — with the exception of Australia, New Zealand and Mongolia — and liquid balance sheets.

Foreign capital flows are also returning to emerging Asia, although the risk of reversal remains due to market uncertainty around US interest rates and US dollar strengthening, China’s re-balancing, potential policy changes in key economies, and global/regional political issues.

In terms of long-term risks, corporate and household leverage remain elevated in parts of APAC, but the build-up has slowed, supporting the banks’ asset quality. Furthermore, property prices are rising in many economies, amplifying bank credit risks in the case of a major market correction.

Latent property-related risks are more pronounced in Australia, China, Hong Kong, New Zealand, Malaysia and India, based on property price appreciation, the banks’ exposure level, or both.

Moody’s expects that the trend for government support will be stable for the majority of APAC banking systems. This is because regulators are not keen to embrace wider bail-in measures and early public support remains the preferred way to prevent banking stress in most systems. The exception rather than the rule is Hong Kong, which is moving closer to an operational resolution regime and will likely implement one in 2017, and this situation could lead to a lower level of government support uplift for some banks.

The banking systems where Moody’s has coverage in Asia Pacific include, with the advanced economies, Australia, Hong Kong, Singapore, Japan, New Zealand, Korea and Taiwan. In the case of the emerging and developing economies, they include China, Bangladesh, India, Indonesia, Malaysia, Mongolia, Thailand, the Philippines, Sri Lanka and Vietnam.