Banks www.fitchratings.com 31 January 2011 Asia­Pacific Outlook Report 2011 Outlook:Asia‐Pacific Banks Rating Outlook Good Defensive Qualities: The Stable Outlook on most rated Asia‐Pacific (APAC) banks’ ratings is underpinned by their reasonable capacities to cope with the threat of a still uncertain global economic environment. However, Fitch Ratings has a cautious outlook on banks in Vietnam and China. This is because their moderating profitability and relentless loan growth are pressuring capital, thereby weakening their credit profiles; a challenge which is reflected in their low Individual Ratings. Healthy butSlightly LowerEconomic Growth in 2011: Fitch expects APAC growth to be healthy in 2011, albeit slightly lower than in 2010. While the region’s sharp recovery since H209 has supported banks’ credit profiles, it has also raised the risks of inflation and asset bubbles. Some central banks around the region have already begun tightening monetary and credit conditions in the face of mounting inflationary pressure. However, a worse‐than‐expected commodities‐inflation shock, and/or policy mis‐steps that see monetary authorities fall “behind the curve” of local inflation expectations, could lead to sharper monetary tightening and a downside risk for Fitch’s growth forecasts. Loan Growth and Steady AssetQuality toSupportProfitability: Steady loan growth, due to the level of optimism in most of APAC, and largely stable credit costs should underpin banks’ profitability, although competition would likely limit margin upside. Capital Satisfactory, butHighGrowth Systems may NeedMoreCapital: Barring any large losses, APAC banks’ capitalisation should remain satisfactory on average, given their stable earnings and level of loan loss reserves. Indeed, these served as effective lines of defence during the 2008/2009 global crisis, enabling them to emerge with their capital largely intact to pursue growth. However, some banks in China, India, Indonesia and Vietnam could need new capital to sustain their growth. Generally Healthy Funding Profiles: Funding is not a concern for most APAC banks, since they are largely deposit‐funded and do not have excessive loan‐to‐deposit ratios. However, banks with weaker deposit franchises in high growth systems may face some pressure. Wholesale‐funded banks in Australia, New Zealand and South Korea are strengthening their liquidity positions, although lower liquidity in global markets, possibly due to European sovereign debt concerns, remains a threat. Basel III Unlikely to be a Major Issue in APAC: Basel III is unlikely to be too onerous for most APAC banks due to their generally higher core capital buffers, modest reliance on hybrid capital and generally healthy liquidity. Still, bigger margins above minimum requirements may be desirable as they support flexibility for growth and instil investor confidence for future access to capital and liquidity. What Could Change the Outlook Key risks common to APAC banks’ ratings and performance are a relapse in the global recovery, and/or a sharp slowdown in China. In addition to hurting trade, these events would likely weaken the sentiment‐sensitive property sector, and in turn challenge banks, given their real estate loan exposures. Such risks appear highest in Australia, China, Hong Kong and Singapore, where home prices have risen appreciably in recent years. Fitch does not expect widespread negative rating actions to ensue across the APAC banks, in light of their satisfactory earnings trajectory, provision coverage and capital, although worse‐than‐expected asset quality deterioration which materially threatens solvency could exert downward pressure on ratings. Rating Outlook S S T T A A B B L L E E Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Mongolia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand N N E E G G A A T T I I V V E E Vietnam Analysts Ambreesh Srivastava (South and South‐East Asia) +65 6796 7218 ambreesh.srivastava@fitchratings.com Jonathan Cornish (North Asia) +852 2263 9901 jonathan.cornish@fitchratings.com John Miles (Australia and New Zealand) +612 8256 0344 john.miles@fitchratings.com John Tham +65 6796 7219 john.tham@fitchratings.com Mark Young +44 20 3530 1053 mark.young@fitchratings.com Related Research Applicable Criteria ∑ Global Financial Institutions Rating Criteria (August 2010) Other Research ∑ Chinese Banks: No Pause in Credit Growth, Still on Pace with 2009 (December 2010) ∑ Singapore Banks Well‐Positioned to Withstand Risks of a Modest Property Price Correction and Fragile External Conditions; Rating Outlook Stable (December 2010) ∑ Malaysian Banks: Annual Review and Outlook (November 2010) ∑ Major Japanese Banks: H1FYE11 Review (December 2010) ∑ Major Australian Banks’ Semi‐Annual Review and Outlook (August 2010) ∑ Philippine Banks’ Annual Review and Ou