Moody's: 2017 outlook for banks in Asia Pacific negative, amid asset quality and profitability challenges

Moody's Investors Service says that the outlook for banks in Asia Pacific for 2017 is negative, because of the challenging operating conditions in the region, which will weigh on the banks' asset quality and profitability.

"Problem assets will rise from a generally low level, due to previous rapid credit expansion, elevated corporate and household leverage in some economies, the ongoing recognition of credit problems, and challenges in commodities and cyclical industries," says Stephen Long, a Moody's Managing Director.

"Foreign private capital flows will remain volatile in emerging Asia, pressuring domestic currencies and weakening operating conditions for the banks," adds Long. "And, property price increases in parts of Asia Pacific will further amplify credit risk for the banks."

In addition, the banks' generally strong profitability will continue to be pressured by higher credit costs.

Nevertheless, Moody's points out that despite the overall negative outlook, downside risks for the banks are partly balanced by the banks' improving capital levels, as well as their strong funding and liquidity profiles.

Moody's analysis is contained in its just-released outlook titled "Banks -- Asia Pacific: 2017 Outlook -- Negative Amid Asset Quality and Profitability Challenges," and is authored by Long.

On the issue of corporate leverage affecting the banks' asset quality, Moody's says that such leverage remains generally elevated in Asia Pacific. And, while the pace of debt accumulation has slowed in many markets -- indicating early deleveraging efforts -- the elevated levels of debt will test the banks' asset quality, as some firms struggle with weak cash flows and high debt levels.

On Chinese banks in particular, Moody's says that these banks will continue to face credit challenges, because their operating environment will stay challenging, reflecting the country's slower economic growth, an increase in corporate sector restructuring, and rising concerns over elevated asset prices in some areas.

As for government support for the banks, Moody's says such support will stay high, because regulators in Asia Pacific are not keen to embrace wider bail-in measures. Hong Kong is the only exception in the region, with ongoing progress towards an operational resolution regime.

Moody's also addresses the issue of emerging risks and opportunities, saying that green bond issuance by banks in Asia Pacific is set to increase further. And, the competition posed by financial technology firms will improve the banks' development and delivery of financial services.

Of the 16 banking systems in Asia Pacific that Moody's analyses, six carry negative outlooks versus three in early 2016. The stable outlooks for the remaining 10 systems reflect the banks' greater resilience against higher solvency risks.

The 16 banking systems analyzed by Moody's are: Australia (negative banking system outlook), China (negative), Hong Kong (negative), India (stable), Indonesia (stable), Japan (stable), Korea (negative), Malaysia (stable), Mongolia (negative), New Zealand (stable), the Philippines (stable), Singapore (negative), Sri Lanka (stable), Taiwan (stable), Thailand (stable) and Vietnam (stable).