APAC emerging market banks' fate rests on sovereign support: Fitch Ratings

They are likely to deteriorate deeper should governments fail to mitigate fiscal risks.

The fate of Asia-Pacific emerging market (EM) banks’ depends on the continued adequate policy support of their local governments, according to a note by Fitch Ratings.

Of the banks who are rated by Fitch, they found that 65% of lenders in developed markets (DM) had their ratings downgraded. This meant that more banks from DM markets faced pressures from a deteriorating operating environment due to economic shocks brought about by the COVID-19 pandemic, which in turn heightened asset quality risk and dragged down profitability.

In contrast, only 48% of banks from emerging markets (EM) saw their ratings revised downwards, with those keeping their outlooks from before the pandemic struck mainly attributed to external and sovereign support.

However, Fitch warned that EM-based banking groups who benefited from sovereign support are more at risk as the economic impact of the coronavirus deepens and governments’ policy responses fail to adequately mitigate risks to the economy, or the fiscal burden of mitigating the risks is outsized.

In these cases, the fate of the banks will mirror that of their sovereign who faces deteriorating outlooks. This has already happened for banks in Malaysia, Thailand, Vietnam and the Philippines, according to Fitch.