ECONOMYNEXT – Capitalization, bad loans and profits of banks in Sri Lanka and India will be among hardest hit in the Asia Pacific region amid a Coronavirus crisis and pre-existing weaknesses, Moody’s Investors Service said in a report.
“Banks’ credit metrics will deteriorate the most in India and Sri Lanka on already weak underlying
fundamentals,” Moody’s said.
Despite substantial risks, creditworthiness of most banks in Asia Pacific would remain intact, the rating agency said.
Sri Lanka was already hit by two currency crises from liquidity injections in 2016 and 2018 which had triggered output shocks and bad loan increases while India was hit by one output shock, before the Coronavirus crisis developed in 2020.
With liquidity injections in March and April pressuring the rupee Sri Lanka’s sovereign credit was downgraded to ‘B-‘ in April by Fitch and Standard and Poor’s. Moody’s which put Sri Lanka on watch as the rupee fell, downgraded to Caa1 (CCC+) in September.
Moody’s said most banks will see a fall in core capital measured as Tangible Common Equity (TCE) from 2019 to 2022.
“Among the 14 APAC banking systems, TCE ratios will decline the most significantly in Sri Lanka and India due to the severity of economic shocks to the countries, banks’ weaker starting solvency metrics, and historically weak underwriting,” the report said.
“By contrast, capitalization will strengthen in Indonesia as a result of banks’ strong profitability.”
Profits measured by return on tangible assets (ROTA) would also fall most in India and Sri Lanka.
“The impact of the pandemic will amplify rises in credit costs and declines in net interest margins that had been underway before the crisis began,” the report said.
“As a result, banks’ profitability, as measured by ROTAs, will deteriorate significantly across APAC in the coming years
Bad loans will also rise, over the next two years though government guarantees have been given for credit to small industries in several countries.
“Based on our financial and econometric models, we project problem loans (NPLs) will double on average across the 14 APAC economies by 2022, led by India and Thailand as economic conditions severely worsen,” Moody’s said.
“Our analysis is focused on cumulative outcomes at the end of 2022, rather than the precise timing of NPL formation, because various loan moratoriums implemented in response to the pandemic will delay the recognition of problem loans.”
Most Asia Pacific countries will see growth contract.
“We expect GDP will contract or significantly slow in 2020 in APAC economies, followed by recoveries in 2021 that will generally result in GDP remaining below its pre-pandemic level,” the report said.
“We project that India, Thailand, Hong Kong and the Philippines will face the most significant GDP contraction in 2020, while China will be among the few countries that will avoid a recession thanks to
ongoing policy support and decisive measures to contain the coronavirus outbreak.
“Vietnam’s economy will also fare better due to early containment of the outbreak.”
Sri Lanka has also contained the outbreak of Coronavirus but state interventions have picked up in the economy with import and exchange controls. (Colombo/Oct06/2020)