Inflation biggest risk to stable outlook for Asia-Pacific banks: S&P Report

Banks in the Asia-Pacific region are likely to remain resilient in 2011 following a year of strong regional economic recovery, says Standard & Poor's Ratings Services in a new report today.

The report, Asia-Pacific Banking Outlook Is Stable Despite Specter Of Inflation, says As most of the Asia-Pacific banking system has benefited from improved earnings, we expect the overall rating trend of the region's banks to remain stable, even if the region's economic growth should slow in 2011.

"With few exceptions, we expect GDP growth in the Asia-Pacific region to exceed growth in most other regions in 2011," said Standard & Poor's credit analyst Naoko Nemoto. "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 added.

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. Most of the rated Asia-Pacific banks have maintained sound asset quality, thanks to the region's robust economic growth.

Among the rated Asia-Pacific banks, 88 per cent of the outlooks on the ratings are stable, 5 per cent are positive, while 7 per cent are negative. Compared with U.S. banks, of which 57 per cent are stable and 37 per cent are negative, the high percentage of stable outlooks in the region supports our view of a resilient Asia-Pacific banking system.

Inflationary pressure remains the single biggest risk that could result in us revising our outlook on Asia-Pacific banking to negative. The impact is likely to come from policy responses to high inflation that could cause steep property price corrections and pressure banks' profitability.