Profit headwinds push banks to increase risk appetite

Asset quality metrics in APAC banks do not reflect the risks, Fitch noted.

Asian banks are selectively increasing their risk appetite amidst pressure on profits, according to a Fitch report.

Banks are relying on various credit channels such as overseas expansions and higher-yielding investment securities to weather headwinds that affect profits, such as high prudential standards, weak growth prospects and the rise of digital technology.

“Most banks in APAC investment grade-markets generally report sound asset quality metrics, but this may not be representative of the risks being built during a benign operating environment,” analysts Jonathan Cornish and Tim Roche wrote.

Stress is already present in China and India, high loan growth is hiding asset quality problems in the Philippines and Vietnam, and Malaysia is facing problems on high household leverage.

However, Fitch noted that most APAC governments continue to be supportive of their banks, especially in Japan, Korea and Taiwan, including on subordinated debt and senior debt. In China, for state support on senior debt remains intact despite the decision to allow some small bank creditors to shoulder losses on senior liabilities.