Banks in emerging Asia, including the Philippines, were seen to weather so-called external shocks, based on the latest stress tests conducted by Moody’s Investors Service published on Thursday.
According to Moody’s, the Asian banks’ cost efficiency, income generation and levels of general loan reserves should help them resist the stress scenarios set out in Moody’s tests.
The ratings agency stress tested 97 banks across emerging economies in Asia. Results show emerging Asian banks are well prepared to resist the conditions set in the testing approach, which includes considering the potential impact of unexpected losses.
Banks in the region would see their capital ratio fall by 5.7 percentage points over the two-year testing period set by Moody’s, down from 11 percent.
Nonperforming loans would expand to 12.5 percent, from 3 percent at the end of 2015.
“These are better results than the average of the near 80 banking systems that Moody’s covered in its regular stress tests,” the ratings agency said in astatement.
“There are a number of reasons that explain why emerging Asian banks outperform other regions in our stress tests,” said Jorge Rodriguez-Valez, Moody’s vice president and coauthor of the report.
“Emerging Asian banks stand out in terms of cost efficiency and they have a strong income generation, as well as significant levels of general reserves, giving them an extra cushion to absorb losses. Finally, their asset composition is also favorable, in particular, due to low exposure to equity securities, which tend to have high expected losses during periods of financial distress,” Ellis added.
Moreover, the US Federal Reserve’s 25-basis-point increase in the federal funds rate was expected to benefit emerging-market economies globally if it stimulates demand for exports.
However, these markets could also suffer if higher US rates lead to a more sustained repricing of financial assets and tighter global financial conditions, it was noted. The most direct impact will felt in those economies that have high external financing needs relative to their foreign-exchange earnings and reserves, according to Moody’s.
Results show differences across the tested countries. Both the Philippines and Thailand outperformed their peers while banks in Indonesia benefit from very high levels of capital, which gives the banks enough buffer to withstand the stress test.
Those economies who remain vulnerable to stressed conditions include banks in Pakistan, Mongolia, Sri Lanka and Vietnam. The report found current levels of capitalization being low and levels of nonperforming loans high.
The tested banks would also be severely hit by their exposure to government bonds with low ratings that would carry high expected loss rates if a stress scenario were to materialize.
Moody’s stress tests are designed to broadly represent a “one in 25 year” event. According to the credit rater, the test consists of common benchmarks based on loss rates, multipliers and haircuts.