Asian banks perform better than expected in H109: Fitch

Fitch today published a review of the results for the first half of 2009 for major banking systems in Asia ex-Japan and has found a consistent theme - results have in almost all cases come in better than expected at the start of the year when Asian economies faced the prospect of very severe recessions.

The first half results suggest that asset quality has deteriorated, but not as rapidly as seemed likely just a few months ago, with the result that the decline in net profitability has also been less steep than Fitch analysts had anticipated and none of the banking systems covered had fallen into net losses.

While cautioning that bad loans will continue to emerge over the next year even as economies stabilise, the agency attributes most of this resilience to the soundness of Asian banks going into the downturn, and the external nature of the economic shock that hit Asia, in contrast to the collapse of credit-fuelled asset bubbles that occurred in some western economies whose aftermath is almost invariably far more damaging to banks.

In China, surging loan growth in H109 has considerably eroded banks' pricing power, weighing on net interest margins and eroding capital ratios. Performance is expected to improve in H209 as credit growth slows, but is likely to remain low relative to prior years. Over the short term, NPL ratios are likely to be kept in check by the denominator effect of strong loan growth, as well as weaknesses in loan classification that result in delayed recognition of NPLs. However, Fitch is increasingly concerned about the medium-term asset quality outlook for Chinese banks given the corporate-heavy orientation of recent lending amid contracting enterprise profits.

"Although headline asset quality indicators improved almost across the board in H109, we remain very concerned about a potential spike in bad loans over the medium term, particularly if corporate profits remain under strain," says Fitch senior director Charlene Chu.

In Korea, the agency believes that the banks will maintain adequate capitalisation while the bottom line profitability will remain weak for the next several quarters given an elevated but still manageable level of credit costs. It notes that the most difficult time for Korea's banks in funding foreign currency has passed.