LENDING & CREDIT, MARKETS | Tim Charlton, India

APAC provisioning levels to remain elevated until 2021: Fitch

Annualised credit costs of 79 APAC banks averaged 1.26% of gross loans in H1.

Provisioning levels will remain elevated across APAC banking sectors through 2021, reports Fitch Ratings, as the lingering effects of the economic fallout continue to strain borrowers’ repayment capacities in may APAC banking sectors—especially with authorities withdrawing support and forbearance measures.

Annualised credit costs across 79 of the largest Fitch-rated banks in APAC increased to an average of 1.26% of gross loans during the first half of 2020, compared to only 0.84% in 2019.

This may reflect the magnitude of policy responses and relative impact of the pandemic economic shock in the region's developed markets, according to Fitch.

This may also reflect banks' superior risk management in these jurisdictions. On the other hand, it could also signal under-provisioning in some cases.

Notably, Indian banks reported a drop in H1 credit costs relative to 2019, making the country a notable exception amongst its regional peers. Its banking sector’s provisioning is in direct contrast with the scale of its economic contraction, which is amongst the steepest in APAC.

However, the origins of this resilience is under questions. It may be a sign of banks’ limited capital buffers in effect to absorb credit losses and may reflect India's incurred-loss accounting approach. But it may be a case of problem loans being underreported and under-provided for, Fitch warned.

“Widespread use of forbearance makes it harder to assess which banks are being more or less conservative in their response to asset-quality pressure. Profitability and asset-quality metrics are likely to be distorted should a bank's reporting of expected credit losses not factor in the full impact from the pandemic shock,” Fitch explained.

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