The coronavirus outbreak will hit Southeast Asian banking sectors and cause weaker economic growth, slower credit gains and dampened profitability, with banks in tourism-dependent Thailand and China-exposed Singapore likely to be the most affected, according to Fitch Ratings.
But Singaporean and Thai banks have sufficient loss-absorption buffers to withstand this pressure, though the impact will depend on the extent and duration of the outbreak, Fitch said.
Banks in Singapore and Thailand have announced relief measures, which should alleviate some near-term asset-quality and profitability pressures.
For Singapore, the measures include a moratorium on principal repayments for 6-12 months on SME property loans and some retail mortgage loans. For Thai banks, they include a moratorium on principal for up to one year for tourism-related loans, and relief measures on credit-card and personal-loan debt.
Other markets have announced stimulus packages, and Thailand, Indonesia, Malaysia and the Philippines have cut interest rates.
Singaporean banks' direct exposure to Greater China, which averages 24% of gross loans, is another potential area of stress.
Fitch has outlined scenarios in which China's GDP growth slows to 5.2-5.7% in 2020, compared with a forecast of 5.9% before the outbreak.
Singaporean banks' China exposure is mainly lending to top-tier corporations, short-term trade loans or liquidity placements with major Chinese banks, which are typically lower-risk but would still be tested by an economic slowdown in China.
Their exposure to Hong Kong, which forms 13% of gross loans, could also be hit, given the more fragile state of the Hong Kong economy and the exposure being more diverse than in China.
Even before the coronavirus outbreak, Fitch's sector outlook for Singaporean banks was negative, reflecting potential for further asset-quality and profitability weakness. Its rating outlook remains stable, due to the banks' sound loss-absorption buffers, with the average common equity Tier 1 (CET1) ratio at 14.4% at the end of 2019, and the banks' highly stable funding and liquidity buffers, which leave sufficient headroom for ratings to withstand economic challenges.
But a prolonged outbreak could affect assessment of Singaporean banks' operating environment, which stands at "aa" with a negative outlook, and this may in turn affect the banks' viability ratings.
Thailand's dependence on tourism means that the SME sector, which accounts for 33% of banks' portfolios, is likely to be significantly affected by the epidemic. The stable sector outlook already incorporates slower economic growth and subdued earnings, but a further slowdown could affect this assessment.
The impact on non-performing loans should be mitigated by the banks' high excess provisions, adequate capital buffers with average CET1 ratio of 16% at the end of 2019, and the relief measures. The rating outlook for Fitch-rated state-owned banks remains positive.
