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.