Inflation biggest risk to stable outlook for Asia-Pacific banking sector, says S&P

KUALA LUMPUR: Inflationary pressure remains the single biggest risk that could result in the revision of its outlook on Asia-Pacific banking to negative, said Standard & Poor's Ratings Services.

It said the impact was likely to come from policy responses to high inflation that could cause steep property price corrections and pressure banks' profitability.

In a statement Tuesday, June 7, S&P said Asia-Pacific banks were likely to remain resilient in 2011 following a year of strong regional economic recovery.

As most of the Asia-Pacific banking system has benefited from improved earnings, the overall rating trend of the region's banks was expected to remain stable, even if the region's economic growth should slow in 2011, it said.

S&P’s credit analyst Naoko Nemoto said that with few exceptions, GDP growth in the Asia-Pacific region was expected to exceed growth in most other regions in 2011.

"As a result, the credit standings of the region's banks should find support from relatively high loan growth and moderate credit costs--we do not expect credit costs to surge significantly in the next two years," she said.

Although higher inflation and tightening monetary policies could put more pressure on borrowers, the negative impact could be mitigated by overall sound credit profiles within the corporate and household sectors, she said.

S&P said most of the rated Asia-Pacific banks had maintained sound asset quality, thanks to the region's robust economic growth.

Among the rated Asia-Pacific banks, 88% of the outlooks on the ratings are stable, 5% are positive, while 7% are negative, it said.

“Compared with US banks, of which 57% are stable and 37% are negative, the high percentage of stable outlooks in the region supports our view of a resilient Asia-Pacific banking system,” it said.