Banks brace for coronavirus impact
Moody’s Investor Services believes the current outbreak of the coronavirus has the potential to hurt asset quality and profitability of Asia Pacific banks.
In a report, the ratings house noted that the severity and length of the outbreak remain highly uncertain. If the virusrelated disruptions are short-lived, there will be a limited credit impact on Asia Pacific economies and banks.
However, the outbreak can also last for a prolonged period and become more severe.
The credit ratings agency believes the ongoing pressure the virus is taking on a global economy will flow through to the banking channels resulting in an economic slowdown.
These channels mostly involve macroeconomic consequences that can take many quarters to materialize, but some events, such as a decline in commodity prices, can have a rapid knock-on effect on banks.
The Moody's report noted that the coronavirus outbreak comes at a time when Asia Pacific banks are already grappling with slowing economic and credit growth, as well as falling interest rates, which will weaken their profitability and asset quality.
If disruptions from the outbreak worsen, governments and regulators in the region will take measures to support their economies, such as fiscal stimulus, monetary policy easing, removal of some macroprudential measures, forbearance or direct support to affected industries/borrowers.
These actions will somewhat mitigate the negative impact of the outbreak on banks.
Moody's vice president and senior credit officer, Eugene Tarzimanov said the impacts from the virus from a economic standpoint may eventually make its way to the broader Australian economy.
"If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia Pacific through various channels," Tarzimanov said.
"While such effects would mostly stem from macroeconomic consequences that can take many quarters to materialize, some events, such as a decline in commodity prices, could have a rapid knock-on effect on banks.”
Subsequent impacts include credit issues in some industries and instability in commodity and financial markets.
Adding to this, since February 1 the Australian government began restricting entry to all foreign visitors who recently have been to China to contain the spread of the coronavirus.
"If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia Pacific through various channels,"
However, this has also had the adverse effect of creating travel restrictions resulting in negative credit for Australia overall. Tourism-related sectors already reeling from ongoing bushfires.
Given tourism accounts for 3.1 per cent of Australia's GDP, the situation will impact banks' asset quality, which already weakened during 2019 - however, banks' direct exposure to tourism-related sectors are small.
Subdued economic conditions could also lead to further rate cuts by the Reserve Bank of Australia bank, weighing on banks' net interest margins.
The central bank has already cut the official cash rate three times by a total of 25 basis points, and further cuts are widely expected by the market for 2020 stated Moody’s.
For now, Moody’s rates ANZ, NAB and Westpac as stable but warns banks’ asset quality to continue to weaken throughout 2020.
China feeling the hit
In their own report, Coronavirus In China: Domestic Banks To Face Stress Test, S&P found that the severity depends on how quickly the government can stabilise the situation and restore normalcy, and the effectiveness of the measures taken to soften the negative impacts on the economy.
The report also noted that although the Chinese banking sector and the economy are much stronger today than they were in 2003 and are in better financial shape to meet the challenges, SARS happened when the Chinese economy was gaining momentum after joining the World Trade Organization in 2001.
With that momentum, the economy probably rebounded from SARS faster than it otherwise would.
"Currently, the Chinese economy is facing multiple risks, which could slow down the recovery of economic activities and potentially bring more pain to the banking sector," S&P credit analyst Ryan Tsang said.