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Earning outlook of Asian banks clouded by slower credit growth, tighter liquidity

While Asian banks are likely to weather well the impact of the U.S.'s tapering of its bond-buying program, their earning will continue to underperform their peers in developed economies in 2014 amid lower credit growth and tighter liquidity, said analysts.

After enjoying huge capital inflows and strong domestic consumption fueled by the U.S. Federal Reserve's quantitative easing in the recent years, Asian banks, excluding those of Japan, are now facing slower credit growth and tighter liquidity that will weigh on their earning outlook going forward.

JP Morgan Asia Pacific Research said the underperformance of Asian banks "will continue for the next two to three quarters, as much of the 'growth adjustment' is still in front of us."

JP Morgan forecast that loan growth in the region will slow from 14 percent this year to 12 percent next year, and earning growth per share of Asian banks would also decelerate from 11 percent to 7 percent, although growth will likely be more resilient in banks of North Asia than those in Southeast Asia.

As higher credit costs will kick-in the region once the U.S. start scaling back its monetary stimulus program, loan growth is likely to decelerate towards deposit growth, and this slowdown will have a significant impact on banks' earnings in the region. JP Morgan said before turning positive on the banking sector of the region, it needed to see loan growth re-base to levels consistent with or exceeding deposit growth.

Standard Chartered Global Research also said as Asian economies move onto a lower long-term growth path relative to recent years, Asian banks face increased headwinds in 2014. Slower economic growth is likely to result in slower loan growth for banks in a number of markets, following years of very strong loan growth.

Indeed, the combination of lower trend economic growth, potentially higher interest rates later in 2014, and tight liquidity might trigger asset-quality deterioration in banks of some countries such as Thailand and Malaysia.

Standard Chartered also found that from funding perspective, strong credit growth in recent years has led to a deterioration in many Asian banks' loan-to-deposit ratios (LDRs), although they remained below 100 percent in most systems except Thailand and South Korea.

Another point of concern is that foreign-currency LDRs have risen for banks in Thailand, Singapore and China's Hong Kong. While there are no signs of imminent danger, high reliance on wholesale foreign-currency funding increases banks' vulnerability to potential funding stresses in some emerging economies of the region.

The silver-lining is that while the U.S. tapering is likely to push up the cost of capital within the region, banking crisis is unlikely to occur in the region, as JP Morgan believed monetary policy in most part of Asia will remain relatively supportive at the moment.

For Asian policy-makers and central bankers, protecting domestic banking stability is very important as private credit-to- GDP ratio is far higher than sovereign debt-to-GDP in the region despite slower credit growth.

Considering the importance of private credit upon the economy, Asian authorities are well aware that the health of the banking system will determine how economies will perform.

Standard Chartered also believed that Asian banks now have stronger loss-absorption capacity than during the Asian financial crisis in 1997 and 98. They have maintained robust capital adequacy ratios, despite strong credit growth in recent years.

[Source: By Tan Shih Ming, Xinhua, Singapore, 12Dec13]

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small logoThis document has been published on 24Dec13 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.