With an easing but still strong outlook for economic growth in Asia this year, banking systems around the region should generally continue to perform quite well, says Fitch.

“In Korea, the banks are achieving what Fitch hoped to see, sustaining good levels of profitability and capital,” said David Marshall, managing director and head of Fitch’s Asia-Pacific banking team at the agency’s Global Banking Conference in Tokyo. “And while capital has fallen back a bit for some banks as loan growth picked up, it remains very satisfactory. Furthermore, despite concerns over sharply rising property prices in some parts of Korea, the high collateralisation of property loans should very much limit any losses for the banks.”

Turning his attention to China, Mr Marshall discussed the structural changes that the partially reformed Chinese banking system has undergone in recent years. The results of these reforms have already borne fruit to some extent, as seen in the banks’ strengthened balanced sheets and greater operational development. However, he noted that interest rates in China are very low relative to GDP growth and inflation: “The low lending rates help fuel the investment boom while the very low deposit interest rates encourage the stock market boom. Although they are reporting strong profits growth, Chinese banks face challenges over the medium term in dealing with disintermediation as the capital market in China evolves and the current highly controlled interest rate regime is liberalised.”

Still on the topic of partially reformed banking systems, Fitch senior director Ambreesh Srivastava commented that while the financial condition of Indian banks has improved with non-performing loan (NPL) ratios having fallen to new lows, the rapid growth of bank credit is somewhat concerning, particularly when interest rates have risen significantly since January 2006.. As a result, some deterioration in asset quality is quite likely, particularly in the relatively unseasoned consumer segment which has also grown the fastest. Nevertheless, on balance, Fitch views such risks as manageable, and maintains a Stable Outlook on its ratings.

Also speaking at the conference, James Longsdon, senior director at Fitch’s banking team in London, highlighted that banks across the globe are 10 times more likely to fail than default on their financial obligations, as they often receive support from third parties in times of stress. To add greater transparency and to ensure bank failure is consistently recorded, Fitch has added a sixth rating category to its Individual Rating scale.

Turning to European banks, Mr Longsdon commented that conditions remain generally benign although organic growth in these mature markets remains a key challenge. Large-scale European cross-border mergers and acquisitions is not the only strategic option open to many of Europe’s largest banks, which will also be increasingly looking more to densely populated and under-banked markets like India and China for growth opportunities.

Lastly, Kenneth Ritz, senior director at Fitch’s banking team in New York, highlighted to the audience that the profitability for US banks remains strong with good asset quality and solid capitalisation. However, he warns that earnings will likely remain constrained by pressured net interest margins (NIMs), weakening credit quality, as well as an increasingly intense competitive market environment. For all these reasons, he commented that further consolidation through mergers and acquisitions of US banks remains likely.