Risky Appetite

January 31, 2012 (LBO) – Rising banking system leverage in Asia-Pacific is increasing rating pressure for banks in the region, Fitch Ratings said. Strong credit growth across the region, particularly in China, is driving the region’s credit-to-GDP up towards its 1998-1999 peak. Credit growth in APAC has accelerated since 2007 due to underlying economic growth and loose global and regional monetary conditions, in particular China’s stimulus measures. The rapid balance-sheet expansion for the banks in some financial systems is likely to be unsustainable.

Rapid expansion often puts pressure on banks’ financial profiles. Relaxed underwriting standards, inadequate controls and speculative investments typically accompany strong credit and asset-price growth. This build-up of credit risks will constrain upward rating momentum and could even lead to downgrades for banks in the region, particularly ones with greater sensitivity to Chinese risk, where the build-up in credit has been greatest and which accounts for 37% of GDP in APAC.

Credit growth in China remains relatively rapid and is likely to gather pace in support of generating higher GDP, with credit-to-GDP likely to exceed 200% in 2013. But funding and capital constraints in the banks could act as a brake on growth a