Coronavirus will hit profitability of Asia Pacific banks through 2021, says Fitch

Asia Pacific banks will find it increasingly challenging to maintain their financial performance as economies around the world get hit by the coronavirus pandemic, Fitch Ratings said.

The ratings agency earlier this month downgraded the outlook for 10 banking systems in the region to “negative.” All 17 banking systems in Asia Pacific that Fitch assesses now have a “negative” outlook.

But the outlook assessment doesn’t necessarily indicate that economies in the region face higher risk of financial instability, Fitch’s Head of Asia-Pacific Bank Ratings Jonathan Cornish said on Tuesday.

“We wouldn’t say that it’s a risk. Definitely in terms of the performances of the banks, we expect them to weaken over the course of (2020) and (2021). But still the banks are generally coming off a pretty sound starting point, with the exception, of course, with a few banking systems mainly in emerging markets,” he told CNBC’s “Squawk Box Asia.”

“But by and large, because of the global financial crisis and the fact that regulators have required banks to build up additional amounts of capital and also improve their liquidity, the starting point is a lot better than what we would have seen otherwise,” he added.

Fitch in a statement earlier this month outlined how the coronavirus pandemic will affect the profitability of banks:

• Weaker economic growth will dampen demand for credit
• Capital market volatility could deter issuance and listing activity
• Lockdowns and movement restrictions will affect the ability of businesses to repay debt, thus weaken asset quality of banks
• Interest rate cuts in many economies will weaken profitability

Cornish said many banks have over the years taken on more risky business activity as interest rates have remained low. For banks in emerging markets such as Malaysia, lower oil prices would add pressure to their profitability, he said.

“We’re talking about a hit that’s going to last for a couple of years and weaken some of the credit profiles, but there’s definitely going to be challenges ahead and they’re going to come in many shapes and forms,” he added.