Easy credit, low interest rates ending in Asia, says S&P

SINGAPORE - The days of easy credit, with low interest rates and ready availability of funding, appear to be coming to an end for banks in Southeast Asia, says Standard & Poor’s. "High levels of household indebtedness in Singapore, Thailand, and Malaysia might leave these banking systems vulnerable to rising interest rates and asset quality pressure," says S&P credit analyst Ivan Tan. "However, we believe banks have sufficient financial buffers to withstand these challenges."

The governments in Singapore and Malaysia have shown a readiness to rein in elevated household debt and impose property cooling measures, S&P says. For Thailand, the promise of an economic revival under the current military government should give a much-needed boost to the country's growth.

“We believe Singapore banks, in particular, will be net beneficiaries under our base-case assumption of gradual rate hikes. Higher interest rates will provide a revenue boost as variable rate loans are re-priced upwards.

“Leading indicators of unemployment and bankruptcy are likely to remain low in Singapore, which would continue to support debt repayment.

“Interest on loans is likely to rise faster than the interest on customer deposits, and we believe interest margins could start to increase from the middle of 2015 as re-pricing kicks in. The rise in margins would mark an important reversal after several years of compression.

“Indonesian banks' asset quality and interest margins will continue to be pressured in 2015. The deterioration in Indonesian banks' asset quality is likely to be gradual, coming off a very low base, and its impact on credit costs should be manageable.

“Banks will continue to feel the squeeze on their liquidity and interest margins, but will remain among the most profitable by global standards. We view the government's structural economic reforms as supportive of the country's long-term economic growth, and eventually beneficial for its banks.

“Vietnam's measures to stabilise its economy over the past few years have also been bearing fruit. Economic growth has picked up, albeit from a low base, and confidence in the local currency has increased, which has improved banks' operating conditions.

“However, lingering asset quality issues following years of explosive credit growth, along with weak capitalisation and industry fragmentation, will continue to weigh on Vietnam's banking system in 2015.

“Good economic prospects and ample systemic liquidity will continue to support the financial profiles of Philippine banks in 2015. However, robust loan growth, especially a gradual shift toward higher-yielding (and higher-risk) consumer loans, could cause credit costs to rise.

“We also expect interest rates to rise, which may cause banks to book marked-to-market losses on fixed-rate government bonds. Meanwhile, fierce local competition will constrain banks' ability to reprice their loans amid rising interest rates.”  www.standardandpoors.com (ATI).