Not so fast: Asset quality and profitability qualms darken 2016 outlook for Asia-Pac banks

Different year, same economic woes for banks.

It’s not time to pop the champagne just yet for Asia-Pacific banks, as analysts say the same ghosts of asset quality and profitability will be haunting financial institutions into next year.

According to a report by Moody’s, the deterioration is caused by a growing pessimism for GDP growth in the region, potential further pressure on currencies, and rising levels of debt in select countries.

"Bank ratings will remain broadly stable because of good capital levels, as well as strong funding and liquidity profiles, as most systems are deposit funded, but the risk for ratings are skewed to the downside in the event of an economic slowdown in the region that is sharper than expected," said Stephen Long, managing director for Moody's financial institutions group in Asia-Pacific.

Moody’s also adds that the operating environment is becoming more challenging in most Asia-Pacific banking systems, as the banks feel the tug of subdued global growth, led by the weakness in China.

“Slower GDP growth is most pronounced for small and open economies, such as Taiwan, Singapore and Hong Kong. By contrast, growth in India and Vietnam, banking systems that have been under pressure in recent years, will be more resilient,” the report said.

Meanwhile, despite asset quality pressures, Asia-Pac banks are still on stable footing due to the strength of their loss absorbing buffers.

“Profitability will likely weaken but remain sufficiently strong, so that rising impairment expenses can be absorbed without resulting in weaker capitalization. A moderation in loan growth will also be supportive of relatively stable capital ratios,” the report explained.