Further deterioration expected in Asian banks<\/p>\n
SINGAPORE (Agencies): Ratings agency Standard & Poor's (S&P)
\nsaid yesterday it expects further deterioration in the financial
\nstate of Asian banks.<\/p>\n
\"Banks in Asia still have some further deterioration and
\ndownside to go,\" Ken McLay, director of S&P's Financial
\nInstitutions Ratings Services, told a conference.<\/p>\n
\"We believe there will be minimum profitability for banks in
\nSoutheast Asia as there will be substantial deterioration in
\nasset quality,\" he said.<\/p>\n
\"S&P has most banks in Asia in the speculative grade, in the
\nBB category or below which factored in the weakening in asset
\nquality, reduced profitability and the need for capital,\" McLay
\nlater told reporters.<\/p>\n
A major concern clouding the future of most Asian banks was
\nhow capital would be sourced to provide for the banks' huge non-
\nperforming loans.<\/p>\n
By the middle of 1999, Malaysia non-performing loan were seen
\nhitting 18 percent, Thailand's 35 percent and Indonesia's 55
\npercent, McLay said.<\/p>\n
These were significantly higher than the latest figures given
\nby regulators, which showed Malaysia's non-performing loan at
\nnine percent, Thailand's at 25 percent for commercial banks and
\nIndonesia's at eight percent.<\/p>\n
As a result, Malaysian banks would urgently require an
\nestimated US$10 billion in recapitalization, Thailand $20 billion
\nand Indonesia $15 billion.<\/p>\n
McLay said the predictions were made before recent unrest in
\nIndonesia and projections for Indonesia might be on the low end.<\/p>\n
Based on S&P's leading banking crisis indicators -- which
\ninclude asset price inflation, external liabilities of the
\nbanking system and level of credit and credit growth -- McLay saw
\n\"some worrying signs\" in Malaysia and the Philippines.<\/p>\n
McLay, however, stressed banks in both Malaysia and the
\nPhilippines are fundamentally strong, with strong capital
\npositions, compared to counterparts in Thailand or Indonesia.<\/p>\n
\"We do not foresee the kind of situation we saw in Thailand
\nand Indonesia,\" he said.<\/p>\n
High risks are also seen in China and Indonesia as well as
\nThailand, where private sector debt has grown sharply and is
\nincreasingly funded by foreign borrowings.<\/p>\n
Singapore banks, together with Hong Kong banks, rest at the
\nlower end of S&P's risk spectrum.<\/p>\n
McLay said while Singapore banks were more stable compared to
\nits Asian counterparts, \"their economic risks have increased as
\nwell, with banks experiencing weakening in asset quality\".<\/p>\n
Indonesia<\/p>\n
Separately, Moody's Investors Service Inc. said Indonesia
\nfaces a \"broadly insolvent banking system,\" with as much as 30
\npercent to 75 percent of the banks' loans insolvent or on their
\nway to insolvency, the ratings agency noted in a report issued in
\nHong Kong.<\/p>\n
Moody's said the nation's banking system will reestablish
\nitself in the long run, but said that in the short term, \"social
\nand political unrest continue to cause capital flight and will
\ndelay government efforts to deal with the crisis, as well as the
\nreturn of foreign or domestic investment.\"<\/p>\n
The ratings agency said high interest rates, a severe lack of
\nliquidity and low capital levels are crippling Indonesian banks,
\nand ultimately the nation's corporate sector.<\/p>\n
Moody's said its average E financial strength rating for banks
\nindicates their existing or impending insolvency and need for
\noutside support. The banks' long-term foreign currency debt
\nratings are Caa3, below the B3 country ceiling, because of
\nMoody's concerns about whether support will be available in
\nenough quantity and with enough speed to prevent investors'
\nlosses.<\/p>\n
Long-term foreign currency deposit ratings are now all Ca, in
\nline with Moody's March 20 downgrading of Indonesia's foreign
\ncurrency deposit ceiling, reflecting past payment delays and the
\nlikelihood of more delays in the future.<\/p>\n
Moody's noted that most banks can't lend, and are desperate to
\ncollect on outstanding loans so they can satisfy depositors' and
\ncreditors' demands for payment. The rating agency said the few
\nbanks that are able to lend are unwilling to do so, because of
\nworries over credit risks.<\/p>\n
\"Foreign currency availability is the biggest problem,\"
\nMoody's said, \"and many banks, particularly the private banks,
\nsimply have no foreign currency.\"<\/p>\n
The ratings agency said pre-crisis capital levels, measured as
\nthe cushion available to absorb potential losses in the loan
\nportfolio, were stretched thin by growth in the private sector
\nand extremely low in the state sector. Capital levels are even
\nless adequate now in light of the decline in asset quality over
\nthe past few months, according to the report.<\/p>\n
New provisioning requirements could reduce almost all banks'
\ncapital ratios below the 5 percent level that qualifies a bank
\nfor IBRA supervision. But the few strong private banks, Moody's
\nsaid, \"will be in a better position to raise capital locally, and
\neventually internationally), providing them with the necessary
\nresources to cope with the heavy burden of bad loans even they
\nwill have.\"<\/p>\n
The rating agency noted that the sources of recapitalization
\nfor Indonesian banks are uncertain, and pointed out that the cost
\nto charge off bad loans and restore the banking system to 8
\npercent capital adequacy ratio could reach Rp 200 trillion (about
\nUS$20 billion).<\/p>\n
Moody's said the more costly banks to salvage will be the most
\nvulnerable. \"In the absence of foreign investors,
\nrecapitalization will fall to the government and much of banking
\nsystem's private sector will effectively be nationalized,\" the
\nratings agency said.<\/p>\n
\"The ramifications of this nationalization are hard to foresee
\nin the current uncertain political environment, but... delayed
\npayments are likely and some sort of debt rescheduling is a
\ndistinct possibility,\" Moody's said.<\/p>",
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