Singapore banking downgrade marks an end to Asian resilience

By:
Matthew Turner
Published on:

Declining bank-stability scores across Asia in the second quarter of 2013 highlight rising global macroeconomic risks, as the world’s regional growth engine confronts leverage and financial-imbalance risks, say analysts.

Asian bank-stability risks remain a key concern among ECR economists, according to the latest results of Euromoney’s Country Risk Survey. Six of the 14 countries surveyed in Q2 2013 had lower bank-stability scores compared with a year earlier, while seven became marginally safer and one remained unchanged.

 

The survey’s bank-stability indicator measures banking-sector strength, and ranges from a score of 10 – signifying a perfectly functioning system with all possible exposures comfortably covered – to zero, where a systematic breakdown in the banking system has occurred.

Declining bank-stability scores across Asia this quarter gives credence to the view that Asian economic fundamentals are deteriorating amid a build-up of financial imbalances owing to strong credit growth, according to Nomura.

“There is strong international evidence that investment booms associated with credit booms often lead to misallocations of capital, and China is no exception,” states a report by Nomura.

“Elsewhere in Asia, investment-to-GDP ratios are much lower than in China, but most have been rising, which is urgently needed for the economies to develop. However, there are some signs of misallocation, notably in the property markets. Low interest rates have fuelled property market booms in several countries.”

China’s banking sector has emerged as the principal source of sovereign risk in the region, according to ECR analysts. The sovereign’s bank-stability indicator fell by 0.2 points to 5.5 in the second quarter of 2013, 0.4 points below the average Asian bank-stability score.

The deterioration in China’s bank-stability score comes at a time of growing fears over the size of the country’s shadow banking sector, with shadow financing now thought to account for half of the overall credit growth in the economy.

Meanwhile, concerns over Indonesia’s banking-sector risks continue to rise after analysts knocked 0.2 points off the country’s bank-stability indicator. With a bank-stability score of 5.3 points, Indonesia’s banks are now perceived to be riskier than the Asian average.

“Besides the issue of extending credit to riskier corporates, rapid loan growth can lead to asset-quality problems unless properly managed,” reports Asiamoney, the sister publication of Euromoney Country Risk.

“Indonesia is vulnerable in this regard, says S&P. The banking system is highly fragmented with 120 commercial banks. The top five banks account for almost half of total loans as of December 31, 2012.”

Adding to rising fears over leverage in Asia, Moody’s placed Singapore’s banking sector on negative outlook on Monday, citing concerns of rapid loan growth and rising real-estate prices, which have increased the probability of a deterioration in the banks’ credit profiles, states a report by Moody’s.

Despite Moody’s rating action, Singapore retains a solid bank-stability score and ranks alongside some of the world’s safest banking sectors, including New Zealand, Chile, Luxembourg and Sweden.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.