Pandemic's impact on APAC banks to stay ‘longer than expected': Fitch

Downturns will be steeper than a normal cyclical downturn and stay until 2021.

The coronavirus pandemic will have more serious ramifications on Asia Pacific banks than those of a normal cyclical downturn as operating environments in the region will be adversely impacted over the next two years, said a Fitch Ratings report.

Feeble domestic and international economies are shrinking growth prospects and elevating the risk of asset quality deterioration, which could lead to the erosion of loss-absorption buffers and heightened sensitivity to financial stress.

Whilst Fitch adopts a “through-the-cycle” approach in their assessments, the pandemic cannot be compared with a regular downturn, as the downside shock has been faster and deeper and damages may linger despite higher 2021 GDP growth in many markets, the report said.

Latest forecasts show that China and India will see their slowest expansion in decades and other markets will hit multi-year lows. Recovery is likely in 2021, but most economies will still lag longer-term growth averages and some will not regain the contraction.

“In some cases, deterioration in asset quality may not become apparent until next year, when the effect of government policy measures introduced to offset the crisis begins to fade,” Fitch added.

Lenders with the lowest loss-absorption headroom at any given rating level are at risk of greater negative rating action, according to Fitch. Fitch will also consider evidence of financial profile deterioration in past stress situations and vulnerability.

“The deeper the shock and the shallower the recovery, the longer it will take for banks' credit profiles to be commensurate with higher ratings. On the other hand, if we assess any deterioration as likely to be moderate, or expect banks to recover within the next two years, then ratings action may be limited to negative outlooks,” the report said.