Further deterioration expected in Asian banks

Further deterioration expected in Asian banks

SINGAPORE (Agencies): Ratings agency Standard & Poor's (S&P) said yesterday it expects further deterioration in the financial state of Asian banks.

"Banks in Asia still have some further deterioration and downside to go," Ken McLay, director of S&P's Financial Institutions Ratings Services, told a conference.

"We believe there will be minimum profitability for banks in Southeast Asia as there will be substantial deterioration in asset quality," he said.

"S&P has most banks in Asia in the speculative grade, in the BB category or below which factored in the weakening in asset quality, reduced profitability and the need for capital," McLay later told reporters.

A major concern clouding the future of most Asian banks was how capital would be sourced to provide for the banks' huge non- performing loans.

By the middle of 1999, Malaysia non-performing loan were seen hitting 18 percent, Thailand's 35 percent and Indonesia's 55 percent, McLay said.

These were significantly higher than the latest figures given by regulators, which showed Malaysia's non-performing loan at nine percent, Thailand's at 25 percent for commercial banks and Indonesia's at eight percent.

As a result, Malaysian banks would urgently require an estimated US$10 billion in recapitalization, Thailand $20 billion and Indonesia $15 billion.

McLay said the predictions were made before recent unrest in Indonesia and projections for Indonesia might be on the low end.

Based on S&P's leading banking crisis indicators -- which include asset price inflation, external liabilities of the banking system and level of credit and credit growth -- McLay saw "some worrying signs" in Malaysia and the Philippines.

McLay, however, stressed banks in both Malaysia and the Philippines are fundamentally strong, with strong capital positions, compared to counterparts in Thailand or Indonesia.

"We do not foresee the kind of situation we saw in Thailand and Indonesia," he said.

High risks are also seen in China and Indonesia as well as Thailand, where private sector debt has grown sharply and is increasingly funded by foreign borrowings.

Singapore banks, together with Hong Kong banks, rest at the lower end of S&P's risk spectrum.

McLay said while Singapore banks were more stable compared to its Asian counterparts, "their economic risks have increased as well, with banks experiencing weakening in asset quality".

Indonesia

Separately, Moody's Investors Service Inc. said Indonesia faces a "broadly insolvent banking system," with as much as 30 percent to 75 percent of the banks' loans insolvent or on their way to insolvency, the ratings agency noted in a report issued in Hong Kong.

Moody's said the nation's banking system will reestablish itself in the long run, but said that in the short term, "social and political unrest continue to cause capital flight and will delay government efforts to deal with the crisis, as well as the return of foreign or domestic investment."

The ratings agency said high interest rates, a severe lack of liquidity and low capital levels are crippling Indonesian banks, and ultimately the nation's corporate sector.

Moody's said its average E financial strength rating for banks indicates their existing or impending insolvency and need for outside support. The banks' long-term foreign currency debt ratings are Caa3, below the B3 country ceiling, because of Moody's concerns about whether support will be available in enough quantity and with enough speed to prevent investors' losses.

Long-term foreign currency deposit ratings are now all Ca, in line with Moody's March 20 downgrading of Indonesia's foreign currency deposit ceiling, reflecting past payment delays and the likelihood of more delays in the future.

Moody's noted that most banks can't lend, and are desperate to collect on outstanding loans so they can satisfy depositors' and creditors' demands for payment. The rating agency said the few banks that are able to lend are unwilling to do so, because of worries over credit risks.

"Foreign currency availability is the biggest problem," Moody's said, "and many banks, particularly the private banks, simply have no foreign currency."

The ratings agency said pre-crisis capital levels, measured as the cushion available to absorb potential losses in the loan portfolio, were stretched thin by growth in the private sector and extremely low in the state sector. Capital levels are even less adequate now in light of the decline in asset quality over the past few months, according to the report.

New provisioning requirements could reduce almost all banks' capital ratios below the 5 percent level that qualifies a bank for IBRA supervision. But the few strong private banks, Moody's said, "will be in a better position to raise capital locally, and eventually internationally), providing them with the necessary resources to cope with the heavy burden of bad loans even they will have."

The rating agency noted that the sources of recapitalization for Indonesian banks are uncertain, and pointed out that the cost to charge off bad loans and restore the banking system to 8 percent capital adequacy ratio could reach Rp 200 trillion (about US$20 billion).

Moody's said the more costly banks to salvage will be the most vulnerable. "In the absence of foreign investors, recapitalization will fall to the government and much of banking system's private sector will effectively be nationalized," the ratings agency said.

"The ramifications of this nationalization are hard to foresee in the current uncertain political environment, but... delayed payments are likely and some sort of debt rescheduling is a distinct possibility," Moody's said.