Fitch Ratings previously anticipated broadly stable operating conditions across most Asia-Pacific banking systems in 2025, but a surge in US tariffs could threaten this assumption in some markets.
The effect of the trade war on specific banking systems in the region will depend on final tariff outcomes, their impact on local economic growth, banks' exposure to vulnerable sectors, and the potential for changes in fiscal, monetary or credit policy.
Our current neutral outlooks for the South Korean, Taiwanese and Thai banking sectors in 2025 could move to deteriorating if there are substantial further increases in US tariffs beyond the 10% rate imposed on all US trade partners on April 2, or if the hit to their economic growth is more severe than we expected.
This could occur if the US moves ahead with the higher country-specific reciprocal tariffs that are currently paused, or because of higher tariffs on sectors such as electronics (including semiconductors).
Banks' profitability and asset quality would likely weaken in these markets under a higher tariff scenario, given their relatively high export exposure and sales to the US, and the substantial hikes that these markets faced under the latest US tariff announcements (before the suspension).
There is also a risk that policy interest rates could be lower than we anticipated if tariffs are higher, which would weigh on net interest margins (NIM) in these markets.
Higher tariffs would reinforce our deteriorating banking sector outlooks for China and Hong Kong. The former partly reflects our expectation that government initiatives to bolster China's economy will maintain pressure on profitability.
For Hong Kong, we predicted the largest rise in non-performing loans (NPLs) in Asia-Pacific this year, attributed to a lingering property sector malaise. Banking systems in both China and Hong Kong face subdued loan demand compared with historical averages.
We could also move the 2025 banking sector outlook on Vietnam to neutral from improving if we assess the local fallout from the US trade war will be more serious than we assumed.
Vietnam has the highest degree of export exposure to the US market of any economy in Asia-Pacific and would be especially vulnerable to lower economic growth if the April 2 tariffs are eventually implemented in full.
Fitch believes Vietnamese authorities could persuade banks to reduce lending rates as part of their efforts to support economic activity if high tariffs are enacted, leading to lower NIM. However, the 2025 system loan growth quota is 16% and could increase further, while NPL rates might rise only moderately due to possible loan relief and forbearance.
Overall, this could lead to slower yet still solid banking sector revenue and profit growth, weaker asset quality, and little capital accrual.
We believe the neutral banking sector outlooks elsewhere in Asia-Pacific are more resilient to a higher US tariff regime. This reflects these economies' generally lower direct export exposure to the US.
However, there is still risk in these markets that bank asset quality in specific sectors could be adversely affected by further US tariff hikes, or that they could be hit by indirect trade effects.
For example, banks' performance could weaken if China's economic growth slows due to the tariffs, hitting demand for exports from their home markets. The trade war could also prompt national authorities to cut policy interest rates faster than we assumed, which would lower banking sector NIM in most markets.
Any changes in sector outlooks should have little impact on our banking system operating environment scores, which remain relatively stable, although China's would potentially face the most downward pressure.