APAC Banking Sector Performance in 2022-2023: Navigating Economic Headwinds

The Asia-Pacific (APAC) banking sector faced a dynamic landscape in 2022-2023, marked by economic headwinds and varying performance across emerging markets (EMs) and developed markets (DMs). Let’s delve into the key trends and outlook for APAC banks during this period.

1. Steady Outlook Despite Challenges

Despite challenges stemming from weakening global demand, high inflation, and interest rate fluctuations, the outlook for APAC banking systems remains neutral. The following factors contribute to this assessment:

• Robust Economic Growth: India and Southeast Asia continue to experience robust economic growth, providing a favourable backdrop for APAC EM banking systems. Additionally, China’s resilience, despite external pressures, contributes to steady financial performance.
• Loan Expansion: The anticipated economic growth supports loan expansion, benefiting net revenue. However, this growth must be balanced against potential asset quality deterioration.

2. Different Trajectories for EMs and DMs

Emerging Markets (EMs)

• Steady Financial Performance: Most APAC EM banking systems reported steady financial performance in 2023, with only mild variance compared to 2022. This reflects the positive economic outlook in India and Southeast Asia.
• Asset Quality: While loan expansion is likely, banks must manage asset quality. Relief and forbearance measures may be extended in some EMs, but overall loan provisioning remains sound.
• Sri Lanka’s Challenges: Sri Lanka faces acute challenges due to its operating environment. The sovereign’s default on foreign-currency obligations in May 2022 has heightened vulnerability in Sri Lankan banks’ financial profiles.

Developed Markets (DMs)

• Mixed Performance: APAC DM banking systems exhibit more mixed financial performance. However, key metrics in most DMs maintain headroom relative to their Viability Ratings (VRs).
• Common Equity Tier 1 (CET1) Ratios: CET1 ratios, crucial for loss absorption buffers, are expected to remain similar to 2022 levels across APAC DMs.
• Singapore’s Improving Outlook: Singapore’s profitability metrics strengthen, even amid external challenges. However, this may not be sufficient to drive bank ratings higher.

3. Asset Quality and Interest Rates

• Interest Rate Increases: Following rate hikes in 2022 (excluding China and Japan), the interplay between asset quality and net interest margins becomes critical.
• Moderate Loan Deterioration: APAC banks are likely to experience moderate loan deterioration as support measures unwind. Indian state banks, while having lower buffers, benefit from assumptions around sovereign support.
• Property Sector Risks: Adverse housing market dynamics could impact DM banks, especially in regions like Vietnam, where property sector refinancing risk has risen.

Let’s delve deeper into the performance of specific countries within the APAC banking sector during 2022-2023:

1. India:

• Economic Resilience: India’s banking system demonstrated resilience despite pandemic-related challenges. The country’s robust economic growth supported loan expansion, benefiting net revenue. However, asset quality remains a concern, especially in light of the second wave of COVID-19.
• Digital Transformation: Indian banks accelerated their digital transformation efforts, embracing online banking, mobile apps, and contactless payments. Fintech collaborations and digital lending platforms gained prominence.
• Asset Quality: While non-performing loans (NPLs) increased due to pandemic-induced stress, proactive measures by regulators and banks helped mitigate risks.

2. China:

• Steady Performance: China’s banking system maintained stability, supported by government policies and prudent risk management. Despite external pressures (such as the Evergrande crisis), Chinese banks remained resilient.
• Property Sector Risks: The property market slowdown posed challenges, impacting banks with significant exposure to real estate loans. Authorities closely monitored property developers’ liquidity and debt repayment capabilities.
• Digital Innovation: Chinese banks continued to lead in digital innovation, with widespread adoption of mobile payments, online banking, and blockchain technology.

3. Singapore:

• Profitability Metrics: Singaporean banks improved profitability metrics, even amid external challenges. However, this positive trend may not be sufficient to drive bank ratings higher.
• Wealth Management: Singapore’s position as a global financial hub strengthened its wealth management sector. Banks focused on high-net-worth clients and expanded their private banking services.
• Regulatory Environment: Singapore maintained a robust regulatory framework, emphasizing risk management, anti-money laundering (AML) compliance, and cybersecurity.

4. Australia:

• Housing Market: Australia’s banking system faced headwinds due to the property market. The surge in housing prices raised concerns about affordability and potential risks in mortgage portfolios.
• Regulatory Scrutiny: Regulators closely monitored lending practices, ensuring responsible lending standards. Stress tests assessed banks’ resilience to adverse scenarios.
• Digital Shift: Australian banks accelerated their digital transformation, enhancing customer experiences through online channels and personalized services.

5. Japan:

• Low-Interest Rate Environment: Japan’s prolonged low-interest rate environment challenged banks’ profitability. Net interest margins remained compressed, impacting earnings.
• Ageing Population: Demographic shifts influenced banking strategies. Banks explored new revenue streams beyond traditional lending, such as wealth management and insurance.
• Consolidation Trends: Mergers and acquisitions continued, aiming to improve efficiency and competitiveness.

6. South Korea:

• Digital Banking: South Korean banks embraced digitalization, offering innovative services and enhancing customer engagement. Fintech partnerships and open banking initiatives gained traction.
• Corporate Restructuring: Banks supported corporate restructuring efforts, especially in sectors affected by the pandemic. Loan quality improved as businesses adapted to changing market dynamics.
• Regulatory Reforms: Regulatory changes encouraged competition and innovation, fostering a dynamic banking landscape.

In summary, APAC banking systems navigated economic headwinds differently based on their unique contexts. While challenges persisted, prudent risk management, digitalization, and regulatory vigilance were common themes across countries. As we look ahead, adaptability and resilience will remain critical for sustained regional growth.

Conclusion

The APAC banking sector’s resilience amid economic challenges underscores its adaptability. As banks navigate uncertainties, maintaining prudent risk management and capital adequacy will be crucial. Despite headwinds, the region’s growth prospects remain promising.

Blog by Amith Raj S