Housing risks emerge for Asia Pacific banks

  • By AB+F Editorial

Banks in the Asia-Pacific region are increasingly exposed to housing-related risks particularly in the Australian and New Zealand banking sectors, according to the latest research from Fitch Ratings. 

According to Fitch, the Australian and New Zealand banking sectors have the greatest exposure to property market stress, while banks in Sri Lanka, Mongolia and Vietnam have the least protection from loss-absorption buffers. 

“We believe that regulatory oversight and macro-prudential policies should contain the direct effect of a residential property downturn on banks, especially in developed markets where loss-absorption buffers tend to be higher,” the Fitch report said.

“However, accommodative monetary and economic policies could aggravate leverage.” 

In general, developed economies in Asia have higher banking-sector exposure to property and more indebted household sectors than emerging countries. 

“Australia and New Zealand are two stand-out cases, with household debt-to-GDP ratios of 129 per cent and 94 per cent, respectively, at end-2018. 

“However, banking systems in developed markets have more experience of managing property cycles and stronger loss-absorption buffers, and the authorities' proactive approach should cushion the impact on banks from a property market stress,” the report said. 

The report noted that rising household debt increases risks for banks as borrowers' debt-servicing capacity becomes more sensitive to economic factors, and a high reliance on property to collateralise loans exposes banks in a property market downturn. 

In particular, Fitch highlighting the key role that regulators have in managing this risk, acknowledging the move by regulators to contain any risks. 

“Regulators in most of the region's developed markets have introduced macro-prudential measures to stem property-sector risks and to strengthen banking-sector resilience to potential property stress,” the report said.

Recently ASIC noted that it’s move to appeal the Federal Court’s decision in its Westpac case was driven by the need to ensure responsible lending standards remained robust in light of of a potential economic downturn. 

“We believe that policymakers will remain focused on measures that support stability and prevent risks of overheating, despite recent macro-prudential loosening in Australia, New Zealand and Taiwan to support their economies. 

“We expect Hong Kong, Singapore and South Korea to maintain the tighter bias in their policy settings,” the report said. 

Assessing the broader Asia Pacific landscape, Fitch noted that in emerging countries, banks' exposure to the property sector tends to be lower, but risks are building in light of their strong property lending in recent years, due in part to governments relying increasingly on property to support their economies. 

Property-related risks in India and Sri Lanka may be understated due to indirect exposures and limited data transparency.

Vietnamese banks appear susceptible in light of rapid consumer loan growth coupled with large legacy bad-debt issues and thin capital buffers. That said, a significant deterioration in Vietnam's property market seems remote amid strong economic prospects.

In China, banks' property exposure has increased significantly over the past decade, but only to 15 per cent of banking sector assets at end-March 2019, while household debt-to-GDP had risen to 53 per cent by end-2018 from 30 per cent at end-2012. 

“The risks may be partly mitigated by macro-prudential and other measures, but the Chinese authorities frequently intervene to manage the housing sector. However, rising household debt adds to the challenges for domestic consumption and the financial sector.”