Uncertainty in banking in the US and Europe has raised concerns about the health of the global sector, and implications for the broader economy. But evidence suggests Asia’s banks should withstand any trouble.
Volatility in sections of the global banking industry could affect Asia through two channels: adding to the export downturn, and restricting cross-border financial flows, hurting asset prices.
The critical question for regional financial stability is one of magnitude. Will any shock resemble the global financial crisis or early stages of the COVID-19 pandemic, or will it be mild?
ANZ Research believes it will be the latter, as fundamentals in Asia’s banking sector – and economy - are in decent shape and capable of withstanding such a shock. This view is based on the holistic assessment of external-sector vulnerabilities; stability and underlying risks to domestic banking systems; and equity and property price valuations.
Admittedly, there are weaknesses on some parameters. Nonetheless, these are isolated and none of the economies looked at by ANZ Research - India, Indonesia, Malaysia, the Philippines, South Korea and Thailand - score poorly on all three areas of assessment.
There’s interesting insight found in focusing on the extent to which net FX reserves cover the stock of net portfolio liabilities and short-term external borrowings. That coverage has been stable to improving in all economies except Malaysia and South Korea - well above the safety threshold.
Malaysia is an outlier, although that is more of a statistical anomaly given the consolidated regional external liabilities of its banks. South Korea’s coverage has moderately weakened but this is more than compensated by the fact it is a net creditor economy and its overseas portfolio assets exceed its liabilities. The most notable improvement has been in India where this metric is considerably stronger than during the 2013-14 taper tantrum.
FX reserves exceed net portfolio liabilities in all economies except Indonesia, where this metric has been stable over time. They also exceed the sum of short-term external borrowings and net portfolio liabilities in all economies except Indonesia. This is a critical strength, as portfolio outflows and cross border banking flows can move together in periods of extreme financial market volatility.
The upshot to this healthy coverage is it will allow central banks in the region to step up intervention in the FX market and temper depreciation pressures on currencies.
Current account positions across the six economies are poised to improve in 2023, which will translate into surpluses in the basic balance of payments in all economies, barring India and the Philippines.
Separately, policy coordination among global central banks has emerged as an important consideration in ensuring stability in emerging markets. For now, volatility is far from dire levels.
ANZ Research takes comfort from the stable deposit base and liquidity of domestic banks. While banking systems in Asia are not directly reliant on offshore funding to fund domestic lending, these parameters are still critical in safeguarding against global contagion and ensuring the supply of credit.
The funding profile among the region’s banks is sound. Deposits are the main source of funding, and a significant proportion come from households. Household deposits are usually stickier and more so, in Asia, where alternatives such as money market funds are less developed.
Average deposit sizes are small with a high proportion of accounts falling under the coverage limits of their respective economies’ deposit insurance schemes. This reduces the risk of a bank run.
Liquidity coverage ratios are generally healthy and are either at or higher than pre-pandemic levels. The proportion of liquid assets to total assets remains similar too; the Philippines is an exception, but its liquid-assets-to-deposits ratio is high.
The share of securities in banks’ asset base has risen materially since the pandemic only in the Philippines and Indonesia. In both economies, the bulk of securities are local government securities.
As the US Federal Reserve has demonstrated, central banks can opt to allow stressed banks to pledge their holdings of government securities as collateral in exchange for liquidity if needed, as opposed to forced selling and realising potential losses.
ANZ Research maintains the view equity valuations and property valuations remain reasonable in these markets.
Forward price-to-earnings ratios are lower than other powerful shocks, including the global financial crisis (GFC), taper tantrum or COVID-19 pandemic.
India continues to be the exception and there is scope for correction even after taking into consideration its intrinsic strengths, such as more stable GDP and corporate earnings growth. Of course, reasonable valuations offer partial and incomplete insulation against global shocks.
ANZ Research’s thoughts on the property market are also unchanged. The house price to income (proxied by nominal GDP) ratio remains on a downtrend in all economies. That is not to say property prices have not risen but rather the extent of the price rise has been milder than in incomes.
South Korea had been the exception to this phenomenon, and an adjustment via a price correction is underway.
That house prices have risen by more than leverage further attests to the fact household savings have been the main driver. Home prices driven by leverage are usually more susceptible to corrections.
Sanjay Mathur is Chief Economist, Southeast Asia & India and Krystal Tan is an Economist at ANZ
This story is an edited version of an ANZ Research report published April 3, 2023
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