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Southeast Asian banks face rising bad debt risks



Asian Banks are facing great risk regarding their loans due to high interest rate differentials as the era of cheap money is over.

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Asian Banks are facing great risk regarding their loans due to high interest rate differentials as the era of cheap money is over.

From Singapore to Thailand, banks are keeping an eye on the books to see if there is a loan that cannot be repaid.  This move comes in the context of continuously increasing global borrowing costs and the world economy is expected to fall into recession due to many contrary winds from geopolitical tensions to lengthening high inflation.

 Southeast Asian banks face rising bad debt risks ph: Bangkok Bank | [email protected]_2

The three largest banks in ASEAN including DBS Group Holdings, Oversea-Chinese Banking Corp.  and United Overseas Bank, are all turning their attention to the decision to set lending rates from the US Federal Reserve (Fed).

With the Fed maintaining its strategy of raising interest rates this year to curb inflation, Singapore banks benefited from an increase in net profit margin.

At the same time, DBS and other banks are also reviewing the credit risk associated with unsustainable loans.  In a report published in October 2022, Malaysia's Malayan Banking warned of the consequences that Singapore banks face from lending in North Asia.

UOB has 17% of its total debt portfolio related to Chinese assets as it is already its largest market geographically after Singapore.  In its third-quarter earnings report, this bank highlighted that Chinese real estate companies generated S$3 billion in their book value.

After the earnings report of UOB and some other peer-to-peer banks, Moody's Investors Service emphasised the pressure is on Chinese real estate companies who own part of a problem loan at Singapore banks.  The ranking agency also said that their asset quality has deteriorated as high interest rates put pressure on borrowers.

Other Asian banks are also facing credit risk.  In its October 2022 report, financial research firm CreditSights noted that Thailand is among the countries with a relatively high ratio of household debt to GDP.

Floating interest rates will go up when the cheap money era ends and this will put an extra burden on people trying to pay off their home loans At the same time, it increases the risk that the majority of these banks' loans will not be able to pay.

CreditSights highlights that Bangkok Bank has 80% of floating-rate mortgage loans, while TMBhanachart Bank has 90%.

In a report published in November 2022, CreditSights noted that Indonesian banks, despite good profitability and higher profit margins thanks to high lending rates, are also struggling because of the heterogeneous outlook in their asset quality.

Indonesia's financial regulator has launched a loan restructuring program for borrowers severely affected by the Covid-19 epidemic, but this policy is expected to end in the first quarter of 2023.  Indonesian officials said that the program could be extended to a limited extent for industries that have not yet recovered from the pandemic.

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In a report issued in October 2022, Fitch Solutions also presented a similar situation for banks in Malaysia.  Particularly, they assessed the possibility of default because households and small and medium companies could not continue to pay their debts after the repayment support program ended.  And now there are also a number of debt businesses that have defaulted.

Southeast Asian banks face rising bad debt risks

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