Most Asia-Pacific banks have buffers against commodity risks – Moody’s

Banks in Asia Pacific (ex-Japan) show moderate loan exposure to borrowers in commodity-related industries, with such loans making up around 7 percent of gross loans on average at end-2015, Moody’s Investors Service said ina report.

However, the quality of such loans will likely continue to deteriorate, based on Moody’s assessment that energy and commodity prices will remain low over a prolonged period.

“In Asia Pacific (ex-Japan), the riskiest exposure for banks in terms of energy and other commodity loans originate from metals and mining, as well as from certain parts of the oil and gas sector, including services, offshore marine and shipping and shipbuilders,” said Eugene Tarzimanov, a Moody’s Vice President and Senior Credit Officer.

“In general, we do not expect negative bank rating actions related to commodity exposures, because banks in Asia Pacific have either good financial buffers, moderate commodity exposures, or ratings that already capture asset quality weakness,” Tarzimanov added.

The report said that based on Moody’s expectation that commodity prices will stay low for a prolonged period, corporate earnings will be negatively affected; thereby weakening the debt repayment capacity of many commodity firms, and creating pressure on or delaying the recovery of asset quality and profitability for the banks in Asia Pacific.

The pressure on the quality of commodity-related loans could lead to possible negative bank rating actions in Singapore, Korea and Mongolia over the next 12-18 months, as reflected in Moody’s negative outlooks on many banks in these economies, it said.

The report said that for oil & gas and related industries such as shipping and ship and rig building, banks in Singapore and Korea are more exposed when compared with other banks in Asia Pacific. In Singapore and Korea, the exposure is around 5 percent of gross loans.

As for the metals & mining sector, banks most exposed to these sectors are in Mongolia (10 percent of gross loans), India (7 percent, including steel), Indonesia (around 5 percent) and China (around 4 percent). The global metals & mining sector has been under stress for many years and some Asia Pacific banks demonstrate large legacy problem loans in this industry.

On the issue of agriculture-related exposures, Moody’s does not expect a material weakening in the banks’ asset quality, because global agriculture prices have shown better performance relative to energy and metals prices. Moody’s pointed out that banks most exposed to agriculture are in New Zealand (14 percent of gross loans), India (13 percent), and Thailand (around 6 percent).

The report said that overall, banks in Asia Pacific demonstrated good buffers against rising credit risks, despite the likely continued pressure on the quality of their commodity portfolios.


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