APAC Banking Systems Exposed to High Private Sector Leverage

Moody’s Investors Services says that many banking systems in Asia Pacific are still exposed to elevated levels of private sector leverage, although the build-up of such leverage has slowed.

Moody’s explained on Tuesday that leverage levels are high in many markets in APAC because of the unusually long period of low interest rates in the region, Moodys.com reported.

Specifically, private sector credit as a percentage of GDP rose in 12 of the 14 major Asian systems over the past decade, led by China, Hong Kong, Singapore, South Korea and Vietnam.

“Elevated and rising private leverage represent a negative credit development for the banks, because this situation undermines the resilience of borrowers to economic shocks, and constitutes a structural banking system vulnerability,” says Christine Kuo, a Moody’s senior vice president.

“The banks are not only exposed to direct default risks on their exposures, but also to an economy’s broader adjustments to a debt overhang, including the risk of an economic slowdown and deep asset price corrections,” adds Eugene Tarzimanov, a Moody’s vice president and senior credit officer.”The buildup of these long-term risks contributed to a number of Moody’s bank downgrades in 2016 and 2017.”

Moody’s conclusions are contained in its just-released report, “Banks–Asia-Pacific: Private sector leverage remains a structural challenge for many banking systems,” and is co-authored by Kuo and Tarzimanov.

Moody’s report points out that vulnerabilities exist in the APAC corporate sector, although the current slowdown in debt accumulation in most markets and higher economic growth expectations are both positive.

China and India are the most exposed to high corporate leverage risks, followed by Indonesia, Vietnam, Korea and Hong Kong. This assessment is based on Moody’s analysis of corporate leverage relative to GDP, interest coverage ratios, and capital structures.

Moody’s report covers 14 APAC economies: Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam.