Taxing environment weighing down on ASEAN, Indian banks

Government support will offset but not fully eliminate the pressure.

The demanding economic and credit conditions are taking a toll on ASEAN and Indian banks’ asset quality and profitability, according to a Moody’s sector report.

Moody's senior credit officer Eugene Tarzimanov expects these two aspects to deteriorate from good levels in 2019 across most banking systems, with Singapore, Malaysia and the Philippines having the best asset quality with nonperforming loans below 2%. Whilst government support measures will offset some of the pressure, they will not fully eliminate the consequences, he said.

"In ASEAN and India, bank downgrades in 2020 have been driven by Indian banks, following the downgrade of the sovereign in June," Tarzimanov noted, adding that the majority of lenders in the region are fit at their ratings despite a higher share of negative outlooks on bank ratings.

On the bright side, the majority are still well-capitalised and their funding and liquidity will likely remain stable until 2021. Regulators in India, Thailand and Vietnam have restricted bank dividends, whilst the largest lenders will still gain from deposit inflows as they are seen as refuge in times of stress.

Moody's expects the GDP of most ASEAN economies and India will contract in 2020 and gradually recover in 2021. The relaxation of lockdowns and resumption of economic activity will be key factors supporting the recovery, the report concluded.