2012 Outlook Asia-Pacific Banks

Banks
Asia-Pacific
2012 Outlook: Asia-Pacific Banks

Broadly Stable; Downside Risks Exist
Outlook Report
Rating Outlook
STABLE
China, Hong Kong, India, Indonesia, Japan, Malaysia, Mongolia, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Vietnam
Rating Outlook
Broadly Stable: Asia-Pacific (APAC) banks ratings have generally stable outlooks, reflecting Fitch Ratings view of their ability at their existing rating levels to weather the weaker global economy, or the ability and willingness of the respective sovereigns to provide support. Key elements to this rating outlook include the ability to absorb higher credit losses as economic activity slows, as well as the strength of funding structures. Economic Headwinds: Against the backdrop of the global environment, Fitch expects that slower APAC GDP growth will help in most cases to contain inflation and the risk of an asset bubble. More accommodative policy actions are expected to support economic activity which the agency expects to remain reasonably healthy by global standards. China/Europe Downside Risks: Fitch remains cautious on Chinese banks. Funding and liquidity pressures are growing, as banks balance rising forbearance/asset-quality burdens with pressure to lend in support of economic growth. This is adding downward pressure on Viability Ratings (VRs) within China, and could also have an impact on the VRs of banks based in regional centres where exposure to China has grown such as Hong Kong and Singapore. Downside risk is also heightened by potential economic contagion from Europe and/or structural economic deterioration in China. Higher NPLs, but Manageable: NPL ratios across the region are expected to rise in 2012, but the trend is not unexpected since most at near-cyclical-lows. Countries that may surprise on the upside should conditions deteriorate further are China, India and Vietnam.
NEGATIVE
Australia, New Zealand
Figure 1
Asia-Pacific Banks: Rating Outlooks/Watches

Developed market Asia/Australasia Emerging market Asia (%) 100 80 60 40 20 0 Positive Outlook/ Watch Source: Fitch Stable Outlook Negative Outlook/ Watch
Strong Loss-Absorption Capacity: Notwithstanding some downward pressure on earnings, pre-provision profit should remain strong and therefore adequate to absorbing the higher expected credit impairment charges. Thin profitability, however, remains a feature of the Japanese and Taiwanese banking sectors. The prospect of slower credit growth and adequate profitability should mean that capital adequacy is unlikely to be under threat for most banks. Markets where capital pressures do exist are in China, Vietnam, Mongolia and India. With regard to India, the government is expected to play a key role in providing injections of core equity. Funding, a Strength: Except for a few APAC markets, Fitch considers bank funding structures a strength with healthy loan/deposit indicators, given the largely deposit-funded balance sheets. More wholesale-funded markets such as South Korea and Australia have been bolstering liquidity. That said, the Rating Watch Negative (RWN) for the four major Australian banks largely reflects Fitchs view that despite significant improvement, these banks continue to have a weaker funding profile than other global peers of a similar high rating level.
Related Research
Other Outlooks
www.fitchratings.com/outlooks
Analysts
Mark Young (Head of Asia-Pacific Banks) +65 6796 7229 mark.young@fitchratings.com Ambreesh Srivastava (South and South-East Asia) +65 6796 7218 ambreesh.srivastava@fitchratings.com John Miles (Australia and New Zealand) +612 8256 0344 john.miles@fitchratings.com Jonathan Cornish (North Asia) +852 2263 9901 jonathan.cornish@fitchratings.com
What Could Change the Outlook

Significant Economic Slowdown: Evidence of a structural as opposed to cyclical slowing of Chinas economy and/or contagion from Europe, would have wider negative economic implications for APAC. This, together with the impact on sensitive property markets, would be a potential negative rating trigger.
www.fitchratings.com
31 January 2012
Banks
Rating Outlook
Australia
Reliance on Wholesale: Wholesale funding is concentrated in the four major banks, which account for around 80% of system assets. Such reliance is likely to decline further in 2012 as deposit growth continues to outstrip credit growth. Weak demand for credit will play a significant role, but most banks appear more intent on building and preserving the proportion of deposits in their funding mix. Nonetheless, reliance on wholesale funding remains high, and is the main reason for the Long-Term IDRs being on RWN. Balance Sheets Bolstered: An upward trend in capital and liquidity ratios looks set to continue into 2012, as Australian banks ready themselves for more onerous regulatory requirements under Basel III. More broadly, Fitch considers Australian regulatory requirements for capital adequacy to be relatively conservative as evident in high risk-weightings (eg residential mortgages) and capital charges (eg interest-rate risk in the banking book). Modest Growth Prospects: Credit growth shows no signs of accelerating in 2012, as cautious consumer and business sectors monitor and evaluate the impact on the Asia-Pacific region of volatility in Europe and the US. Australian banks' balance sheets remain healthy and capable of producing robust results; but while this air of caution prevails, profit growth is likely to be flatto-modest at best. Sound Asset Quality: Although growth is likely to be modest, economic activity should be sufficiently robust to support stable asset quality. Asset mixes for Australian banks are relatively low-risk, being weighted towards secured residential and small businesses loans, with little by way of exposure to proprietary trading assets. Although household debt levels are relatively high, strong collateral positions and mortgage insurance offer considerable protection against any substantial loss in the event of a downturn in Australia's housing market. Impact from Global Developments: Australian banks are better placed than in 2007 to deal with any potential economic turmoil, having taken appropriate steps to tighten underwriting, strengthen liquidity and improve capital. The most likely source is a China-led economic downturn in the Asia-Pacific region, precipitated by further deterioration in Europe. However, there is flexibility to absorb shocks through Australia's floating exchange rate, and to provide stimulus via adjustments to fiscal and monetary policy.
NEGATIVE
Banking Systemic Risk Indicator
Australia B2
Reliance on wholesale funding is declining, but remains significant. Sound asset quality and continued improvements in liquidity and capital. Slow credit growth makes profit growth difficult.
Figure 2
Australian Banks: Rating Outlooks/Watches

(%) 100 80 60 40 20 0 Positive Outlook/ Watch Source: Fitch Stable Outlook Negative Outlook/ Watch

Financial Market Disorder: Market disorder has the potential to disrupt the banks' wholesale funding initiatives in 2012. Liquidity holdings and active pre-funding in wholesale markets provide a buffer, should there be an extended period of dislocation. Imprudent Growth: With credit demand forecast to be weak in 2012, banks may be tempted to loosen underwriting standards in the pursuit of loan growth. A major loosening of standards could lead to negative rating action. Terms of Trade Reversal: The negative effects of a sharp reversal in Australia's terms of trade could flow through to the job market and bank asset quality. As of January 2012, Fitch views this scenario as unlikely.
Analysts
Tim Roche +61 2 8256 0310 tim.roche@fitchratings.com John Miles +61 2 8256 0344 john.miles@fitchratings.com
2012 Outlook: Asia-Pacific Banks January 2012
Banks
Figure 3 Figure 4
Australia: Key Performance Trends

Return on assets and return on equity
ROA (LHS) (%) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Australian Prudential Regulation (APRA), Fitch ROE (RHS) (%) 18 15 12 9 6 3 0

Credit costs
Of pre-provision profits (LHS) Of average loans (RHS) (%) 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch (%) 1.2 1.0 0.8 0.6 0.4 0.2 0.0
Figure 5
Figure 6

Asset quality - NPL ratio
(%) 2.0 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011E 2012F Source: Reserve Bank of Australia (RBA), Fitch

Capital ratios
(%) 15 12 9 6 3 0 2006 2007 2008 2009 2010 2011E 2012F Source: RBA, Fitch Total CAR Tier 1 CAR
Figure 7
Figure 8

Loan/deposit ratio
(%) 135 130 125 120 115 110 105 100 2006 2007 2008 2009 2010 2011E 2012F Source: APRA, Fitch

Real GDP growth and loan growth
Real GDP growth (LHS) Loan growth (RHS) (%) 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, RBA (%) 20 16 12 8 4 0
Banks
Rating Outlook
China
Funding, Liquidity to Dominate: Tightening funding and liquidity will be the dominant themes in 2012, as deposit strains intensify and banks try to balance rising forbearance burdens with pressure to lend in support of growth. The year will reveal just how vital plentiful liquidity has been to the stability of the Chinese banking system, and how difficult things can become when that abundance is absent. Fitch expects banks to require large funding support to meet credit and forbearance needs, as well as their own growing obligations. Forbearance Burdens to Rise: As the economy slows, corporate profits fall, and more loans extended during the credit boom come due, deterioration in asset quality is expected in several segments of the loan portfolio. Over the near term, Fitch expects that the authorities will continue a policy of forbearance and liquidity support for borrowers. As a result, asset-quality issues may not appear fully in NPL ratios until well into a deterioration, if at all. Still, the fall in cash inflows from these loans will add pressure to banks cash positions, which are already thin. CNY16.5trn of New Financing: Based on a forecast of 8.2% real GDP growth in 2012, new financing should reach upwards of CNY16.5trn based on Fitchs adjusted-Total Societal Financing (TSF) measure. While large, this is below the CNY17.5trn estimated for 2011, meaning credit conditions will continue to feel tight in contrast to the easing that many are expecting. This reflects a mixture of moderating GDP growth, ongoing property curbs, resource constraints from thin financial sector liquidity, and a desire to avoid a repeat of 2009s excesses.
STABLE
China D3
Figure 9
Chinese Banks: Rating Outlooks

(%) 100 80 60 40 20 0 Positive Source: Fitch Stable Negative
Lending Could Reach CNY9trn: Of the CNY16.5trn in new financing, as much as CNY9trn could come in the form of new renminbi and foreign-currency loans. This estimate, above other forecasts, reflects the view that as liquidity tightens and regulatory scrutiny rises, non-banks and offshore banks could find it more difficult to continue providing large financing to Chinese companies. Greater SME lending by banks also could reduce demand for non-bank credit, while the crackdown on some off-balance-sheet activity suggests less credit via these channels. If the growth of shadow financing does indeed decelerate, Chinese banks are likely to be called on to fill the gap in order to maintain GDP growth, leading to higher lending than current consensus forecasts of CNY8trn. New loans of CNY9trn would represent loan growth of 15.5%, which is in line with previous periods of a modestly expansionary policy. CNY4trn Assistance Required: Chinese banks possess an estimated CNY21trn in capacity to extend new loans, roll over existing loans, and provide forbearance. While seemingly ample, this can be exhausted quickly as CNY22trn in existing loans will be coming due in 2012 some of which will require forbearance and others which will be re-extended to good existing borrowers (every CNY1 not received from, or re-extended to, existing borrowers means CNY1 less in new credit). For this reason, substantial funding assistance will be required. Fitch forecasts CNY4trn in liquidity assistance in 2012 via a combination of reserve requirement reductions, central bank reverse repos and auctions of MOF deposits. Reserve requirement relief may not always take the form of blanket, system-wide required reserve ratio (RRR) cuts, but rather targeted releases to banks in need. In this context, the nominal balance of deposit reserves at the central bank could be a more useful indicator in signalling policy than the RRR ratio.
Related Research
Chinese Banks: Cash Cushions Thinning As Liquidity Erodes and Forbearance Burdens Rise (December 2011) Chinese Banks: Growth of Leverage Still Outpacing GDP Growth (July 2011) Fitch Affirms China's Ratings, Revises Local Currency Outlook to Negative (April 2011)
Analysts
Charlene Chu +8610 8517 2112 charlene.chu@fitchratings.com Chunling Wen +8610 8517 2105 chunling.wen@fitchratings.com Hiddy He +8610 8517 2135 hiddy.he@fitchratings.com

IDRs Stable, VRs Pressured: The Long-Term IDRs of Chinese banks are based on expectations of varying degrees of state support, and any revisions would be tied to shifts in the sovereigns perceived ability or willingness to provide such support. The VRs of some banks could be revised down in 2012 if liquidity and funding erosion accelerates, or assetquality deterioration begins to threaten solvency. The most vulnerable ratings are those of smaller banks with weaker liquidity, less deposit funding, and lower capital.
Banks
Figure 10 Figure 11
China: Key Performance Trends

ROA (LHS) (%) 1.2 0.9 0.6 0.3 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks ROE (RHS) (%) 24 18 12 6 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.2 0.9 0.6 0.3 0.0
Figure 12
Figure 13

Classified loans % of total loans
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, China Banking Regulatory Commission (CBRC), banks NPLs Special mention loans

Capital ratios
(%) 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F 2006-07 data excludes Agricultural Bank of China Source: Fitch, banks Total CAR Tangible equity/assets Tier 1 CAR
Figure 14
Figure 15

Loan/deposit ratio
(%) 85 80 75 70 65 60 2006 2007 2008 2009 2010 2011E 2012F Headline ratio Adjusted ratio
China: Net New Deposits

(CNYbn) 15,000 12,000 9,000 6,000 3,000 0 -3,000 2006 2007 2008 2009 2010 9M11 Household Government Other Enterprise Fiscal
Excludes fiscal deposits, includes undiscounted acceptances Source: Fitch, The People's Bank of China (PBOC)
Includes non-resident deposits beginning in 2011 Source: PBOC
Figure 16
Figure 17
China: Fitch-Adjusted TSF

(CNYbn) 18,000 15,000 12,000 9,000 6,000 3,000 0 08 0.70 09 0.18 10 0.34 11E 0.44 12F 0.40 Fitch net new add-ons Net new other financing (TSF) Net new credit financing (TSF) Change in nominal GDP
China: Wealth Management Products Outstandinga

(CNYbn) 10,000 8,000 6,000 4,000 2,000 0 Asset-backed (AB) other b AB discounted bill-related AB loan-related
2007 2008 2009 2010 Q311 Excludes private placements, which are undisclosed
b
Incremental change in GDP/ net new financing Source: Fitch, PBOC
Many were previously grouped with bill WMPs Source: Wind Information
Banks
Rating Outlook
Hong Kong
Key Risk Factors: Fitch identifies concentration on real estate; a volatile operating environment; and opportunistic expansion to China as key risk factors for the Hong Kong banks. Strong collateral, liquidity and capital buffers are substantiating the relatively high rating levels that the Hong Kong banks retain, despite moderate market positions in the case of most banks. Expansion into China: Fitch expects the growth of Hong Kong banks to be tied to expansion into mainland China which could, if successfully executed, boost revenue and broaden loan diversification. Related risks stem from a weaker operating environment, untested collateral recoveries, and more prevalent corporate governance and transparency issues. Hong Kong banks mainland exposures have often been short-term, trade-related and collateralised. Adequate Profitability: Profitability has recovered since 2009, but the low-interest-rate environment will pressure interest margins unless the banks keep repricing loans. In addition, the steady pursuit of medium-term funding (to match asset tenors more closely) will improve liquidity profiles but increase funding costs. Lower global economic activity, particularly trade coupled with weakening domestic property markets and higher inflation, will possibly lead to higher credit costs in 2012 (see Figure 20). Strong Capital: If Basel III had to be implemented right now, Fitchs simulation indicates that Hong Kong banks would encounter very little difficulty in meeting a conservative implementation of the more stringent requirements. The agency believes that the Hong Kong banking system qualifies for a counter-cyclical buffer set at the maximum 2.5% level, and accordingly expects that the banks will increase their regulatory reserves further. Vulnerable to Bank Risk: Credit risk remains balanced between corporate and bank lending (mostly to UK and Asia Pacific banks), at 36% and 33% of consolidated assets, respectively, at end-November 2011. Adding in their substantial holdings of securities at 20% of consolidated assets, and which are weighted more towards bank debt indicates that Hong Kong banks are vulnerable to deterioration in bank credit and a widening in credit spreads. Liquidity Pressures Manageable: Funding benefits from established deposit franchises despite most deposits being short-term. The risk of sudden withdrawals in bank and deposit funding is counterbalanced by substantial liquid assets (cash, bank deposits, securities), amounting to 54% of system-wide assets at end-November 2011. Fitch anticipates that Hong Kong banks would eventually cut back their expansion to China if liquidity tightened drastically. Contagion Risk: In Fitchs view, Hong Kong banks remain vulnerable to waning investor confidence in global growth in general, and China in particular. The banking sector is dependent on foreign bank funding, which amounted to 28% of total liabilities at endSeptember 2011 (2010: 26%). The five largest funding providers (Japanese, Singapore, US, Chinese and UK banks) accounted for a stable 17% of total liabilities, and western European banks 9%. That said, Hong Kong banks have made insignificant use of capital markets funding.
STABLE
Hong Kong B3
Reliance on property collateral. Volatile operating environment. Opportunistic expansion to China.
Figure 18
Hong Kong Banks: Rating Outlooks


Related Research
Hong Kong Banks Exposure to Europe (November 2011) Chinas Growing Importance for Hong Kong Banks (October 2011) Hong Kong (Special Administrative Region, PRC) (October 2011)
Ratings Headwinds: While the Outlooks on the Long-Term IDRs of all Fitch-rated Hong Kong banks is Stable, the agency believes that a stronger-than-expected macroeconomic deterioration and the banks increasing exposure to mainland China could lead to negative rating action. Fitchs analysis will focus on any notable changes in risk management capacity, lending strategies, growth aspiration, capital and contingent liquidity planning. As some of the Hong Kong banks are linked to their Chinese state-owned or Singaporean parents, a change in the parents credit profile or willingness to provide support could affect the ratings of those Hong Kong banks.
Analysts
Sabine Bauer +852 2263 9966 sabine.bauer@fitchratings.com Joyce Huang +852 2263 9595 joyce.huang@fitchratings.com
Banks
Figure 19 Figure 20
Hong Kong: Key Performance Trends

(%) 1.5 1.2 0.9 0.6 0.3 0.0 ROA (LHS) ROE (RHS) (%) 25 20 15 10 5 0

Credit costs
(%) 30 24 18 12 6 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, rated banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.0 0.8 0.6 0.4 0.2 0.0
2006 2007 2008 2009 2010 2011E2012F Source: Fitch, Hong Kong Monetary Authority (HKMA)
Figure 21
Figure 22

Asset quality - Impaired loan ratio
(%) 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011E 2012F Exposures graded "substandard", "doubtful" or "loss" Source: Fitch, HKMA

Capital ratios
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, HKMA Total CAR Tier 1 CAR
Figure 23
Figure 24

Loan/deposit ratio
(%) 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, HKMA

Gross Mainland China Exposures (MCE)
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, HKMA MCE/assets (LHS) Growth in MCE (RHS) (%) 100 75 50 25 0
Figure 25
Hong Kong Banking Sectors Exposure to Mainland China

(HKDbn) Non-bank mainland China exposure Claims on mainland banks Sum: Gross MCE Gross MCE/assetsa (%)
a
2008 858 333 1,191 9.9
2009 1,006 379 1,385 11.4
2010 1,622 1,057 2,679 19.2
Jun 2011 2,034 1,639 3,673 24.0
Sept 2011 2,195 1,791 3,986 25.2
Including overseas offices and exposure of the mainland subsidiaries of Hong Kong-incorporated authorised institutions Source: HKMA, Fitch
Banks
Rating Outlook
India
Economic Turnaround is Key: The stable outlook for Indian banks is premised on a recovery in the domestic economy in 2012, together with a continued commitment by government to maintaining a minimum Tier 1 ratio of 8% for its banks (accounting for 73% of system assets). While this is a base-case scenario, the pressures on the downside are mounting through weakening asset quality and a build-up in credit concentration. Problem Partly Cyclical: Borrowers are affected by rising input costs, including interest rates; a slowdown in demand growth; and sharply fluctuating exchange rates. Part of the problem may ease in mid-2012 if monetary policy were to be relaxed to stimulate growth, though the timing is uncertain given the cost-push of the 11% depreciation of the rupee since January 2011 and its impact on the stubbornly high inflation rate (7.47% in December 2011). Rise in Stressed Assets: The momentum of rising NPLs may continue through most of 2012. Stresses are also building up in infrastructure loans caused by delays in project implementation and cost overruns. Some of these are being restructured; the high single-name concentrations in this business may push up state-owned banks restructured portfolios to 7%8% of total loans, significantly higher than the 4.4% level in the aftermath of the 2008 global financial crisis.
STABLE
India C1
Challenges greater than during the 2008 crisis.
Figure 26
Indian Banks: Rating Outlooks

(%) 100 80 60 40 20 0 Positive Stable Negative Note: Based on National Ratings Source: Fitch
Contained Credit Losses: While the immediate outlook on Indian infrastructure is negative, the long-term viability of the projects which is still intact may help limit credit losses. However, these stressed assets are very thinly reserved, and government banks profit may be eroded by 15%-20% if some loans were to turn non-performing. Profitability could also come under pressure through a volatile net interest margin. Nevertheless, pre-provision operating profit should generally be adequate to absorb the rising costs, leaving equity intact. Equity Injection by Government: As in 2008, government is expected to play a key role in maintaining stability of the banking system through periodic injections of core equity. Fitch understands than a 10-year capitalisation plan is under consideration, which includes maintaining majority shareholding and targeting a core Tier 1 ratio of at least 8% possibly more for the larger, systemically important banks. The timeliness of such support may come under pressure as the government struggles with containing the fiscal deficit. Funding Primarily Through Deposits: Bank funding is mostly domestic (94%), and dominated by customer deposits. However, the deficit liquidity mode and rising short-term funding gaps in government banks increases the refinancing risk, moderated by the slowdown in loan growth and the large holding (20% of assets) of government securities that banks could potentially repo with the Reserve Bank of India (RBI) in a crisis.

Sustained Economic Weakness: If the Indian economy continues to slow down through most of 2012, the resulting problems relating to asset quality could hurt VRs. The IDRs of government banks are closely aligned with the sovereign, and could clearly therefore be affected by any change in the sovereign rating. Lack of Timely Equity: Should expectations weaken over government providing a timely equity injection early in 2012, then this could have an impact on the VRs of government banks and, if chronic, even the IDRs.
Related Research
2012 Outlook: Indian Banks (January 2012)
Analysts
Ananda Bhoumik +91 22 4000 1720 ananda.bhoumik@fitchratings.com Saswata Guha +91 22 4000 1741 saswata.guha@fitchratings.com
Banks
Figure 27 Figure 28
India: Key Performance Trends

ROA (LHS) (%) 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011E2012F Note: The years represent fiscal years ending March Source: Fitch, banks ROE (RHS) (%) 20 15 10 5 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Note: The years represent fiscal years ending March Source: Fitch, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.2 0.9 0.6 0.3 0.0
Figure 29
Figure 30

(%) 4 3 2 1 0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, RBI

Capital ratios
(%) 16 12 8 4 0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, RBI Total CAR Tier 1 CAR
Figure 31
Figure 32

Loan/deposit ratio
(%) 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, RBI

Nominal GDP growth and loan growth
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, RBI Nominal GDP growth Loan growth
Banks
Rating Outlook
Indonesia
Limited Impact from Headwinds: Fitch believes that Indonesian banks should remain resilient to challenging conditions in the global economy. Steady earnings, adequate provisioning and sound capital provide a reasonable buffer. The direct impact of the European debt crisis on Indonesian banks should be limited, in light of the size of the domestic economy and little direct market exposure. Strong Domestic Demand: While Indonesian GDP has been revised downward for 2012 in the light of global pressures, 6% growth should remain achievable due in large part to a domestically orientated economy. Increasing Risk to Growth: Brisk economic growth does, however, have the potential to increase the pressures on the financial system. Fitch has revised Indonesias Macro-Prudential Indicator (MPI; see Macro-Prudential Risk Monitor, dated 8 December 2011) to 3 from 2, despite the sovereign upgrade to BBB.
STABLE
Indonesia D3
Resilient to external challenges; supported by sovereign strength. High loan growth a potential concern for asset quality.
Figure 33
Indonesian Banks: Rating Outlooks

Resilient Earnings But Lower: Fitch expects the banks to continue delivering solid core profitability in 2012, as lower funding costs and manageable credit costs offset competitive pressures; and with lower (but still healthy) loan growth at around 15%. The net interest margin among the highest in Asia remains strong but under pressure, as the rising competition for market share may dampen net interest margins to some extent (see Figure 39). Manageable Asset Quality: NPLs are more likely to start trending upwards from their historical lows, in light of rapid loan growth in the past few years. Nevertheless, Fitch expects both asset quality (see Figure 36) and credit costs (see Figure 35) to remain manageable in 2012 amid domestic economic conditions which are still favourable. Sufficient Capital Buffer: Core capital should remain adequate, despite trending down, as the pressure on capital is counterbalanced by greater earning retention, moderating loan growth and capital injection. Furthermore, equity-capital buffers should remain reasonable in light of the healthy earnings which act as a first line of defence against losses, and in view of the conducive local economy. Higher LDRs: Loan/deposit ratios (LDRs) should continue to rise, with liquidity in US dollars staying tight, but Fitch does not see these as excessive at this stage (see Figure 38). While a sustained economic trajectory should lead to healthy deposit expansion in the medium term, loan growth will continue to outstrip deposit growth which may add to funding pressures for entities with weaker franchises.

Sovereign Rating: A sovereign rating change could lead to a similar change for some of the banks due to significant state ownership, foreign parents and systemic importance. Related Research
2012 Outlook: Indonesian Banks (December 2011) Macro-Prudential Risk Monitor (December 2011)
Rapid Loan Expansion: Reckless loan growth that notably exerts pressure on earnings and quality such that capital impairment risk rises significantly could be negative for the banks outlooks and/or ratings. However, Fitch views this likelihood as low at this stage in view of the banks solid earnings and funding profiles.
Analysts
Julita Wikana +6221 2902 6405 julita.wikana@fitchratings.com Iwan Wisaksana +6221 2902 6406 iwan.wisaksana@fitchratings.com Stefanus Yuniardhi +6221 2902 6407 stefanus.yuniardhi@fitchratings.com
10
Banks
Figure 34 Figure 35
Indonesia: Key Performance Trends

(%) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, 9 major banks ROA (LHS) ROE (RHS) (%) 30 25 20 15 10 5 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, 9 major banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 2.4 1.8 1.2 0.6 0.0
Figure 36
Figure 37

(%) 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F

Capital ratios
(%) 24 18 12 6 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, 9 major banks Total CAR Tier 1 CAR
Source: Fitch, 9 major banks
Figure 38
Figure 39

Loan/deposit ratio
(%) 100 75 50 25 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, 9 major banks

Net interest margin
(%) 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F
Source: Fitch, 9 major banks
11
Banks
Rating Outlook
Japan
Support-Driven IDRs: The IDRs of Japans major banks are underpinned by Fitchs expectation of state support, should it be required. The Japan sovereign ratings Negative Outlook indicates a better-than-even chance of a downgrade over the next 12-18 months. A sovereign downgrade would have an impact on Fitch's assessment of the ability of the sovereign to provide support, and substantial weakening could possibly result in a change in the banks IDRs. Maintaining a Stable Profile: Fitch believes the major banks robust liquidity position and solid asset quality will remain unchanged even in the current uncertain operating conditions, and will underpin the stability of financial profiles. Although a weakening global economy would constrain growth in pre-provision profits (PPPs), PPPs should remain sufficient to cover losses eg from loan-loss charges and/or stock investment losses, as well as an introduction of a lower tax rate from December 2011. Modest Pre-Provision Profit: Domestic net interest income may fall further as weak loan demand in the domestic corporate sector is likely to persist, although there is little room for the already-very-low net interest margin to shrink further. Non-interest income should also decline without the high bond gains posted in the fiscal year ending March 2012 (FYE12). Performance at some of the non-bank subsidiaries may also limit non-interest income. The fall in domestic revenue is likely to offset the effects from cost-reduction and overseas earnings growth.
STABLE
Japan C1
Stability maintained despite global uncertainties. Weak PPPs should still be sufficient to cover costs, and result in further accumulation of retained earnings.
Figure 40
Japanese Banks: Rating Outlooks

Gradual Capital Growth: The agency feels that modest accumulation of retained earnings should continue in FYE13. Risk-weighted assets are unlikely to increase significantly, despite the implementation of Basel 2.5 and Basel 3, as risk exposure in trading accounts is negligible unlike the picture at the major international banks. Their core capital ratio defined by Fitch is therefore expected to grow steadily. Overseas Operations to Expand: With limited growth prospects for domestic earnings, Fitch expects that the major banks will expand their offshore operations further, both organically and non-organically. Although higher earnings from overseas should contribute to their PPPs, the agency expects the growth to be rather gradual unless there are significant developments such as major acquisitions.

Rating Triggers for IDRs: Positive changes in VRs are not likely to affect IDRs, given the gap between IDRs and VRs. As the Long-Term IDRs are at their Support Rating Floor of A, any negative rating action is most likely to stem from any perceived significant weakening in either the ability or willingness of Japans sovereign to provide support. Rating Triggers for VRs: Meaningful and sustainable growth in PPPs and/or an aboveexpectation reduction in stock investments will exert positive pressure on VRs. Conversely, unexpected spikes in loan-loss charges and/or stock investment losses may pressure the VRs, if such losses exceed PPPs and threaten core capitalisation. Aggressive inorganic offshore investment could trigger a rating action, depending on the amount of investment and the potential impact on the banks' risk and/or financial profiles. Analysts
Chikako Horiuchi +81 3 3288 2972 chikako.horiuchi@fitchratings.com Reiko Toritani +81 3 3288 2673 reiko.toritani@fitchratings.com Miki Murakami +81 3 3288 2686 miki.murakami@fitchratings.com 2012 Outlook: Asia-Pacific Banks January 2012
12
Banks
Figure 41 Figure 42
Japan: Key Performance Trends

ROA (LHS) (%) 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 2006 2007 2008 2009 2010 2011E2012F Note: The years represent fiscal years ending March Source: Fitch, Japan's 3 'Mega' Banks ROE (RHS) (%) 12 9 6 3 0 -3 -6

Credit costs
(%) 90 75 60 45 30 15 0 Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.2 1.0 0.8 0.6 0.4 0.2 0.0
2006 2007 2008 2009 2010 2011E2012F Note: The years represent fiscal years ending March Source: Fitch, Japan's 3 'Mega' Banks
Figure 43
Figure 44

(%) 2.5 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, Japan's 3 'Mega' Banks

Capital ratios
(%) 20 16 12 8 4 0 2006 Total CAR Tier 1 CAR
2007
2008
2009
2010 2011E 2012F
Note: The years represent fiscal years ending March Source: Fitch, Japan's 3 'Mega' Banks
Figure 45
Figure 46

Loan/deposit ratio
(%) 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Note: The years represent fiscal years ending March Source: Fitch, Japan's 3 'Mega' Banks
Change in GDP Deflator vs. the Gap Between Bank Lending and GDP (Nominal)
(%) 4 2 0 -2 -4 Bank lending to GDP (RHS) GDP deflator (LHS) (%) 1.4 1.2 1.0 0.8 0.6 91 93 95 97 99 01 03 05 07 09 11E 13F
Note: The years represent fiscal years ending March Source: Cabinet Office, Bank of Japan, Fitch
13
Banks
Rating Outlook
Malaysia
Sound Profiles Through Cycles: Fitch expects the credit standing of the rated Malaysian banks to remain steady, noting that the direct impact on their financial profiles from the ongoing sovereign crisis in Europe is unlikely to be significant. Against the backdrop of a fresh downturn resulting from the mounting global headwinds, rated local banks are in Fitchs view likely to emerge with fairly intact balance sheets owing mainly to their satisfactory loss-absorption qualities and risk management, as well as a prudent regulatory environment. Earnings Likely to Moderate: Fitch, however, envisages weaker profitability for Malaysian banks in 2012 (see Figure 48) as credit costs begin to rise (see Figure 49). This is because the Malaysian economy and banking system are not immune to a weak global economy, in view of the countrys high degree of openness to external trade and vulnerabilities of certain sectors. Household Debt Risk: The agency sees the issue of household debt as particularly significant at 76% of end-2010 GDP (see Figure 53) as this leaves the banking sector vulnerable to sharp rises in unemployment and interest rates. However, Bank Negara Malaysia (BNM, the central bank) may take further precautionary measures (in addition to those introduced in 2010H111) to prevent individuals from over-borrowing. This, together with banks risk management, underpins a low probability of widespread asset-quality deterioration in loans to individuals
STABLE
Malaysia C1
Steady credit profiles amid growing external uncertainties. High household debt a potential concern if unemployment rates rise unexpectedly.
Figure 47
Malaysian Banks: Rating Outlooks

Satisfactory Capital: Fitch assesses the core capitalisation of major Malaysian banks while slightly lower by regional comparison as satisfactory, with an average core Tier 1 CAR (without hybrids) of about 9%. The agency expects the local banks capital positions to stay broadly stable. This is also observed under Fitchs stress test, where the impact of higher credit costs can be absorbed largely through banks earnings which leaves just a limited risk of capital erosion. Comfortable Funding and Liquidity: Fitch anticipates that Malaysian banks will still derive their funding primarily from deposits due to ample domestic liquidity, especially since the system-wide loan/deposit ratio has been stable at about 80% over the past five years. However, competition may hamper deposit-gathering efforts for some local banks in their key overseas markets where loan/deposit ratios hover around a higher range of 90%-100%. Basel III Impact: Fitch believes that most major Malaysian banks are able to meet the new capital ratio minimums under Basel III. While capital deductions guidelines of which are still pending may be significant for a few banks, the extended implementation period (until 2019) provides banks with the time to build up equity through retained earnings. However, liquidity rules, by comparison, may be more difficult to comply an issue also voiced by banks and regulators globally and hence are only expected to be finalised after the observation periods.

A Prolonged Downturn: There could be downward rating implications from a fresh economic downturn, particularly if sharp and protracted and resulting in significant capital impairment risks for the Malaysian banks. However, Fitch views this likelihood as relatively low, in view of the banks satisfactory loss-absorption buffer and track record. Regionalisation: Downside rating risks could result for banks that expand aggressively into less-developed markets with legal and/or regulatory concerns, and concurrently reduce core capitalisation. Such a likelihood is low, as Fitch assesses management as generally retaining a modest risk appetite and mindful of challenges in the operating environment abroad. Consolidation: Fitch foresees the pressure for domestic consolidation as likely to increase, since the liberalisation of the Malaysian banking sector could gather pace in the medium term. This may reduce the number of local banks, but leave them individually with a stronger balance sheet and franchise.
Related Research
2012 Outlook: Malaysian Banks (December 2011) Malaysian Banking Prudential Regulations (October 2011) Malaysian Banks: A Peer Study (April 2011) Stress Test on Malaysian Banks (August 2009)
Analysts
Alfred Chan +65 6796 7220 alfred.chan@fitchratings.com Mikho Irawady +65 6796 7230 mikho.irawady@fitchratings.com
14
Banks
Figure 48 Figure 49
Malaysia: Key Performance Trends

ROA (LHS) (%) 1.2 0.9 0.6 0.3 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, BNM, banks ROE (RHS) (%) 20 15 10 5 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, BNM, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.2 0.9 0.6 0.3 0.0
Figure 50
Figure 51

(%) 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F

Capital ratios
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Total CAR Tier 1 CAR
Source: Fitch, BNM
Source: Fitch, BNM
Figure 52
Figure 53

Loan/deposit ratio
(%) 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F

Credit/GDP ratio
(%) 120 90 60 30 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, BNM Overall Household
Source: Fitch, BNM
15
Banks
Rating Outlook
Mongolia
Overheating Credit Growth: Loan growth in the Mongolian banking system registered 59% year-on-year (yoy) in H111, which far exceeded the countrys nominal GDP growth rate of 29% in 2011. Fitch believes that the pace of loan growth is likely to continue, as the country has significant development potential and is attracting substantial foreign investment. Liquidity and Capital Pressured: Although the balance of deposits is growing due to rising household income, the systems loan/deposit ratio has started to increase. This implies an increasing reliance on wholesale funding and liquidity risks if market conditions deteriorate. Notwithstanding current capitalisation levels, Fitch believes the banks will need additional capital to support strong loan growth as well as to absorb unexpected losses in light of Mongolias vulnerability to external shocks. High Profitability May Decline: As competition for both funding and new lending is intensifying, the volume effect of loan growth may be offset by a shrinking net interest margin in 2012 and beyond. With uncertain global macroeconomic conditions, loan quality may weaken and trigger an increase in loan-loss charges, which will erode the higher proportion of lower pre-provision operation profit particularly as the sectors reserve coverage is modest. Large Currency Mismatch: The economy and the banking sector also remain exposed to foreign-exchange risk, as indicated by the net open position in foreign currency to capital and evident from the financial crisis in 2008-2009. In the event of a sharp depreciation of the local currency, the banking system may be exposed to higher credit risk associated with borrowers with a local-currency income and US dollar-denominated debt. Loose Prudential-Measures Implementation: Despite the authorities measures to control credit growth and for banks to maintain adequate capital and liquidity, Fitch believes such efforts could be compromised by lax implementation, at least for the smaller/weaker banks. Banks are not penalised severely if they breach prudential requirements, including breaching liquidity-related requirements. In Fitchs opinion, this could leave banks with only a limited buffer against any unexpected adverse changes in the operating environment. Uncertain Government Support: Fitch believes that the lack of a framework ensuring government support for Mongolias banking sector (in case of need) may challenge the stability of the system should the operating environment change suddenly.
STABLE
a
Mongolia At least 2a Banking system indicator is not available
Overheating credit growth pressuring the systems liquidity and profitability. Further capitalisation necessary to support loan growth and absorb unexpected losses. More stringent banking supervision and resolution scheme needs to be established.
Figure 54
Mongolian Banks: Rating Outlooks


Standalone Strength: Fitch rates two Mongolian banks Khan Bank LLC (B/Positive) and XacBank LLC (B/Stable). The IDRs of both are underpinned by their standalone financial strength, as indicated by VRs at b. Maintaining higher capitalisation and/or reserve levels is essential for any upgrade. Structural improvement or less reliance on wholesale funding would be viewed positively by Fitch. Excessive loan growth without suitable recapitalisation, and/or a sustained deterioration in its capitalisation due to a weakening of loan quality, could lead to negative rating action and/or a change in Outlooks.
Analysts
Chikako Horiuchi +81 3 3288 2972 chikako.horiuchi@fitchratings.com Jonathan Cornish +852 2263 9901 jonathan.cornish@fitchratings.com
16
Banks
Figure 55 Figure 56
Mongolia: Key Performance Trends

(%) 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks ROA (LHS) ROE (RHS) (%) 30 24 18 12 6 0

Credit costs
(%) 40 30 20 10 0 -10 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 2.0 1.5 1.0 0.5 0.0 -0.5
Figure 57
Figure 58

(%) 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F

Capital ratios
(%) 20 16 12 8 4 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, Bank of Mongolia, banks, IMF Total CAR Tier 1 CAR
Source: Fitch, Bank of Mongolia
Figure 59
Figure 60

Loan/deposit ratio
(%) 160 120 80 40 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, Bank of Mongolia

(%) 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, Bank of Mongolia Real GDP growth Loan growth
17
Banks
Rating Outlook
New Zealand
Higher Wholesale Funding Costs: New Zealands four Australian-owned major banks source around one quarter of their funding from offshore wholesale markets. Turmoil in European markets curtailed access for most banks in the latter part of 2011, and Fitch expects that costs will be higher when such access does return. At the same time, greater intensity around banks deposit-gathering initiatives is also likely to place upward pressure on funding costs. The RWN on New Zealand major banks Long-Term IDRs reflects the institutional support of their Australian parents and Fitchs rating action taken on 30 January 2012. The agency believes that despite significant improvements in funding and liquidity, these banks continue to have a weaker funding profile than other similarly highly rated global peers. Strong Balance Sheets: Despite funding pressures, balance sheets are well placed to handle disruption should it continue into 2012. Major banks Tier 1 capital ratios are above the proposed Basel III Tier 1 minimum of 8.5% (see Figure 65); liquid asset holdings have been bolstered; and exposure to offshore short-term funding has come down steadily over the past two years. The banks current settings are sound, and unlikely to improve significantly in 2012. Improving Asset Quality: Asset quality should improve slowly in 2012, benefiting from deleveraging within the household sector and New Zealands relatively large rural sector. At the same time, asset quality should be enhanced further by improving asset values and employment conditions, as well as tighter underwriting criteria (see Figure 64). Fitch does not expect those loan losses which are still to emerge from the Christchurch earthquakes in 2010 and 2011 to have a major impact on banks profitability. Challenging External Environment: New Zealand has been showing signs of improvement from the economic downturn in 2008-2009, but the Christchurch earthquakes have delayed the recovery. Yet rebuilding efforts in the earthquake-struck region are expected to gather momentum in mid-2012, providing a boost to the overall economy. The country should also continue to benefit from strong demand for its soft commodity exports. Earnings Constraints: There is still an air of caution despite New Zealands reasonably stable economic prospects. This will be a major factor contributing to limited balance sheet growth, which when combined with higher funding costs will constrain banks earnings growth in 2012. Nonetheless, Fitch expects that New Zealand banks will still report healthy profitability aided by lower loan-impairment charges, selective asset re-pricing and tight control of costs.
NEGATIVE
New Zealand B2
Improving credit profile, but challenges remain. Healthy financial strength, with improved funding and liquidity positions and strong capitalisation. Slow growth of balance sheets despite an improving environment.
Figure 61
New Zealand Banks: Rating Outlooks/Watches

(%) 100 80 60 40 20 0 Positive Outlook/ Watch Source: Fitch Stable Outlook Negative Outlook/ Watch

Financial Market Disorder: Market disorder has the potential to disrupt wholesale funding initiatives in 2012. While liquidity, strong deposit growth and active pre-funding in wholesale markets provide a buffer, should there be an extended period of dislocation it would pose a threat to the outlook. Imprudent Growth: With credit demand forecast to be moderate in 2012, banks may be tempted to loosen underwriting standards in the pursuit of loan growth. A substantial loosening of standards may lead to a negative outlook. Sharp Economic Deterioration: The negative effects of a sharp reversal in New Zealands terms of trade may flow through to the job market and bank asset quality, leading to a change in outlook. However, Fitch does not place considerable weight on this scenario, in light of the global demand for New Zealands soft commodity goods.
Analysts Andrea Jaehne +61 2 8256 0343 andrea.jaehne@fitchratings.com John Miles +61 2 8256 0344 john.miles@fitchratings.com
18
Banks
Figure 62 Figure 63
New Zealand: Key Performance Trends

(%) 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011 2012F Source: Reserve Bank of New Zealand (RBNZ) ROA (LHS) ROE (RHS) (%) 20 15 10 5 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011 2012F Source: RBNZ Of pre-provision profits (LHS) Of average loans (RHS) (%) 0.8 0.6 0.4 0.2 0.0
Figure 64
Figure 65

(%) 2.5 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011 2012F Source: RBNZ

Capital ratios
(%) 15 12 9 6 3 0 2006 Source: RBNZ Total CAR Tier 1 CAR
2007
2008
2009
2010
2011 2012F
Figure 66
Figure 67

Loan/deposit ratio
(%) 200 160 120 80 40 0 2007 2008 2009 2010 2011 2012F Based on 7 banks: ASB, BNZ, ANZ National, TSB Bank, Westpac New Zealand, SBS Bank and Kiwibank Source: Banks

(%) 4 2 0 -2 -4 2006 2007 2008 2009 2010 2011 2012F Source: RBNZ Real GDP growth (LHS) Loan growth (RHS) (%) 16 8 0 -8 -16
19
Banks
Rating Outlook
Philippines
Reasonable Credit Profiles: Fitch expects the structural balance sheet issues of many rated Philippine banks (including concentrated loan books and foreclosed properties with poor reserves) to be a main source of impairment, especially if the rising global uncertainties were to significantly affect domestic operating conditions. However, the agency believes most major local banks can cope with a fresh downturn, thereby preserving their liquidity and capitalisation. Loan Concentration: Many banks loan books are concentrated on a few large accounts, with the top 20 borrowers/equity ratio ranging from 150%-200%, and hence may face the risk of a rapid weakening of asset quality in a difficult credit environment. However, many Philippine corporations have a reasonable record through economic cycles (owing partly to their healthy balance sheets), thereby supporting the asset quality of the broader system. The Philippines credit/GDP ratio of an average 34% over 2006-2010 was among the lowest in Asia. Other Long-Standing Concerns: Most banks maintain low reserves on foreclosed properties (see Figure 74), which exposes them to provisioning risks in a protracted downturn. Two rated banks Land Bank of the Philippines (BB/Stable) and Rizal Commercial Banking Corp. (BB/ Stable) are still amortising their deferred charges, which represent previous years disposal losses not immediately recognised owing to a forbearance by Bangko Sentral ng Pilipinas (BSP, the central bank). However, such impairment risks are largely buffered by the banks capital.
STABLE
Philippines D1
Reasonably buffered against structural risks.
Figure 68
Philippine Banks: Rating Outlooks

Improved Capital: Fitch expects most rated Philippine banks to maintain sound core capital, which is vital in mitigating risks from their balance sheets and the operating environment. Local capital rules under Basel III effective 1 January 2014 are unlikely to be onerous for the banks. Their average core Tier 1 CAR (without hybrids) was 12.9% at end-September 2011, up from 11.0% at end-2009 due to fresh common equity and retained profit. Liquid and Deposit-Funded: Most major banks in the country have liquid balance sheets and deposits as their main funding source, thanks to ample domestic liquidity. With the system-wide loan/deposit ratio of 60% (see Figure 73), Basel IIIs liquidity standards may be less burdensome for the Philippine banks. Record Profitability May Ease: Fitch expects trading income which drove banks profitability to historical highs in 2010-9M11 will be difficult to sustain in 2012. However, some banks may opt to book one-time unrealised paper gains on their held-to-maturity bonds (which have up until now been recorded at costs), solely by adopting Philippine Financial Reporting Standards 9 on Financial Instruments earlier than the effective date of 1 January 2013. Treasury gains may also result from any decline in interest rates, but could be offset by tighter margins and rising credit costs.

Negative Rating Triggers: Excessive growth, together with a weakened loss-absorption buffer in a difficult environment, would be ratings negative. Downside rating pressure may also result from a fresh economic slowdown, particularly if sharp and prolonged and resulting in significant capital impairment risks for the banks. However, the banks ratings are already fairly low, and Fitch believes the impact of higher credit costs even under the agencys stress test to be manageable for most rated local banks, owing to their reasonable loss-absorption capacity. Positive Rating Triggers: A sustainable asset-quality record may be positive for lower-rated Philippine banks, many of which have higher levels of non-performing assets than their domestic peers. Domestic consolidation could also be ratings positive, particularly for smalland medium-sized banks merging with larger players of a stronger credit standing.
Related Research
Stress Test on Philippine Banks (August 2009) Philippines Banks: Annual Review and Outlook for H211/2012 (July 2011) 2012 Outlook: Philippines Banks (December 2011)
Analysts
Alfred Chan +65 6796 7220 alfred.chan@fitchratings.com Mikho Irawady +65 6796 7230 mikho.irawady@fitchratings.com 2012 Outlook: Asia-Pacific Banks January 2012
20
Banks
Figure 69 Figure 70
Philippines: Key Performance Trends

(%) 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, BSP, banks ROA (LHS) ROE (RHS) (%) 16 12 8 4 0

Credit costs
(%) 40 30 20 10 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, BSP, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.6 1.2 0.8 0.4 0.0
Figure 71
Figure 72

Asset quality - NPA ratio
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F NPA comprises NPLs and foreclosed properties Source: Fitch, BSP

Capital ratios
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, BSP, banks Total CAR Tier 1 CAR
Figure 73
Figure 74

Loan/deposit ratio
(%) 80 60 40 20 0 2006 2007 2008 Source: Fitch, BSP, banks 2009 2010 2011E 2012F

Reserve coverage ratios
NPLs (%) 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, BSP, banks Foreclosed properties Composite
21
Banks
Rating Outlook
Singapore
Strengths Amid External Challenges: Fitch believes Singapore banks should be able to keep their credit profiles intact, even as the odds increase of a fresh global downturn scenario. Such resilience stems from the banks strong, liquid balance sheets, reasonably diversified loan books and satisfactory risk management, and the governments fiscal capacity to introduce counter-cyclical measures to protect the domestic economy, if necessary. Earnings Could Moderate: While revenues are broad-based, profitability could ease in 2012 due to tight margins, volatile trading conditions and rising credit costs. While the direct impact from the sovereign crisis in Europe may not be significant, Fitch does not rule out downward pressure on its 2.5% 2012 GDP growth forecast for Singapore as well as those for Hong Kong, Malaysia, Indonesia and Thailand where Singapore banks have significant operations. Economic Vulnerability: The Singapore economy is among those at risk of a renewed recession due to its small size and high degree of openness. In such an event, weaker global trade will hit the manufacturing, general commerce and transportation sectors, especially export-led businesses. However, Fitch assesses loans to these industries at about 30% of the banks loans as diversified, with a reasonable delinquency record through credit cycles. Significant Property Loans: Larger exposure is to the broad real estate segment at close to 40% of loans of which two-thirds are mortgages and the rest to property developers and investors. Fitch expects a low asset-quality threat from mortgages, with job losses likely to rise only modestly and interest rates staying low. Many developers and investors have healthy leverage, with sharp delinquencies likely to surface only in a prolonged property sector trough. Macro-Prudential Indicator: Fitch revised Singapores MPI to 2 from 1 in December 2011 as real credit growth outpaced GDP growth by an estimated 19% in 2011 (2010: 10%), which suggests a modest potential systemic stress risk on the banking sector. The rapid loan growth was partly accounted for by loans to Chinese corporations, but outstanding loans to China are still modest relative to the local banks balance sheets. Furthermore, maturities are mostly short term, with the risk of credit losses largely mitigated by cash collateral and bank guarantees. Strong Loss-Absorption: Singapore banks capital a historical rating strength underpins their loss-absorption ability. Fitch expects the banks to remain well-capitalised owing to their conservative record and the prudent regulatory environment. Their core Tier 1 CAR (without hybrids) was high at end-September 2011, at an average 11%, and should surpass the Basel III minimums set by the Monetary Authority of Singapore. Stable Funding and Liquidity: The domestic deposit franchise supports funding profiles, and mitigates wholesale funding needs. The banks have relied mainly on Singapore dollar deposits to fund US dollar loan growth, with FX gaps closed via currency swaps, although this has resulted in loan/deposit ratios increasing to about 90% at end-2011 from 82% at end-2010 (see Figure 80). Fitch believes that the tight US dollar liquidity needs to be monitored for funding risks, as the loan/deposit ratios for all three banks US dollar books exceed 100%.
STABLE
Singapore B2
Resilient as global uncertainties persist.
Figure 75
Singapore Banks: Rating Outlooks

Related Research
Singapore Banks: Annual Review and Outlook for 2011 (March 2011) Singapore Banks H111 Review and Outlook (August 2011) Macro-Prudential Risk Monitor (December 2011) 2012 Outlook: Singapore Banks (December 2011)

A Prolonged Downturn: Downside rating risks could result from a fresh recession, particularly if sharp and sustained and which results in significant capital impairment risk. However, Fitch views this likelihood as low, in view of the banks solid loss-absorption qualities. Overseas Expansion: There could be downward rating implications due to event risk, aggressive expansion into less-developed markets with legal and/or regulatory concerns, and a concurrent reduction in core capitalisation. Such prospects are also low at this stage, as Fitch assesses management as generally conservative and mindful of such risks as also demonstrated by their track record.
Analysts
Alfred Chan +65 6796 7220 alfred.chan@fitchratings.com Mikho Irawady +65 6796 7230 mikho.irawady@fitchratings.com
22
Banks
Figure 76 Figure 77
Singapore: Key Performance Trends

(%) 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks ROA (LHS) ROE (RHS) (%) 16 12 8 4 0

Credit costs
Figure 78
Figure 79

Asset quality - NPA ratio
(%) 4 3 2 1 0 2006 2007 2008 2009 2010 2011E 2012F NPAs comprise NPLs, debt securities + contingencies Source: Fitch, banks

Capital ratios
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks Total CAR Tier 1 CAR
Figure 80
Figure 81

Loan/deposit ratio
(%) 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks

GDP growth and real loan growth
(%) 15 12 9 6 3 0 -3 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks Real GDP growth (LHS) Real loan growth (RHS) (%) 30 24 18 12 6 0 -6
23
Banks
Rating Outlook
South Korea
Weaker Performance in 2012: Fitch forecasts the performance of the commercial banks to be weaker than in 2011 (see Figure 83). Underlying profitability should weaken due to competition, the social/political pressure to lower fees, and an increase in credit costs. Margins should narrow because of the cuts in lending rates initiated by Industrial Bank of Korea (IBK, A+/Positive), the policy bank focusing on SME lending, which anticipates a 2012 profit decline of about 20%. That said, Fitch does not expect competition to be too aggressive. Greater Interest Income Dependency: Fitch expects profit structures to become more interest-income dependent than in the past decade after the planned sale of the lenders stake in Hynix Semiconductor Inc. (BB/RWN) in March 2012. The system has made large gains from the sale of equity stakes in companies gained through debt-for-equity swaps after the Asian Crisis (eg KRW3.2trn in 2011 and about KRW1.1trn in 2012). Mortgage Borrowers Class Actions: Following the Supreme Courts decision in August 2011 that fees related to mortgages should be born by the lender, some households are taking class action seeking reimbursement of fees (about 60bp of the loan amount). Fitch estimates the contingent liability to be about KRW5trn (about 40bp of the average assets of the commercial banks) if the court sides with the borrowers and the reimbursement claims become prevalent.
STABLE
South Korea C1
Weakening profitability. Large corporate delinquencies on the rise. Manageable credit costs. Challenges in foreign-currency funding. Strong capitalisation maintained.
Figure 82
South Korea's Banks: Rating Outlooks

Moderate Increase in Loans: Fitch anticipates the commercial banks risk-appetite for lending to remain weak; continuing to focus on mortgage lending, high-quality SMEs (generally large ones and small-office-home-offices), and large corporates. Expecting a significant economic slowdown in 2012, policy financial institutions like IBK have planned to increase their lending to the weak SMEs that are shunned by the commercial banks. Fitch forecasts overall loan growth to continue to be lower than the nominal GDP rate (see Figure 88). Rise in Corporate Delinquencies: Credit costs are likely to increase, but should be manageable unless the banks experience substantial unexpected losses from the failure of large companies especially in weak sectors like shipbuilding, property development and shipping, and from the aforementioned mortgage borrowers claims. Fitch notes a rising trend since 2008 in the delinquency rate of large corporate loans, and believes that a greater number of marginal large businesses will fail if the economic slowdown is prolonged. Challenges in Funding: A considerable amount of foreign-currency debt (about USD25bn) is maturing in 2012. If the capital market volatility persists, the banks would again face significant difficulties. That said, Fitch notes that the banks have been very active in refinancing foreigncurrency funds since 2011; investor confidence in the system is noticeably stronger now than in 2008; and some of South Koreas large foreign-currency reserves would again be available to the banks. Fitch expects no significant change in the loan/deposit ratio. Strong Capitalisation Maintained: Fitch anticipates commercial banks capitalisation to remain strong, with a Tier 1 capital ratio of 11%. The agency estimates there to have been some decline by end-2011 due to the early repayment of hybrid capital, which some banks had received from the government-backed Bank Recapitalisation Fund in March 2009.
Related Research
Fitch Revises Outlooks of Koreas 5 Policy FIs (December 2011) Korea (November 2011) Challenges Facing Koreas Banks (June 2011)

Positive Rating Triggers: Any upside potential is likely to be limited to the five policy banks whose ratings are driven by government support and on Positive Outlook. Fitch does not expect any structural improvement in the commercial banks standalone VRs to be sufficiently significant to merit an upgrade in 2012. Negative Rating Triggers: Downside risk for the commercial banks VRs may arise from any unexpected significant increase in credit costs, deterioration in profitability, or weakening of capitalisation (as in more aggressive credit growth or risk tolerance).
Analysts
Heakyu Chang +822 3278 8363 heakyu.chang@fitchratings.com Mihwa Park +822 3278 8372 mihwa.park@fitchratings.com 2012 Outlook: Asia-Pacific Banks January 2012
24
Banks
Figure 83 Figure 84
South Korea: Key Performance Trends

(%) 1.2 0.9 0.6 0.3 0.0 2006 2007 2008 2009 2010 2011E2012F IFRS in 2011 and 2012 Source: Fitch,Financial Supervisory Service (FSS),banks ROA (LHS) ROE (RHS) (%) 20 15 10 5 0

Credit costs % PPOP and loans
(%) 60 45 30 15 0 2006 2007 2008 2009 2010 2011E2012F IFRS in 2011 and 2012 Source: Fitch, FSS, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.2 0.9 0.6 0.3 0.0
Figure 85
Figure 86

(%) 2.0 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, FSS, banks

Capital ratios
(%) 15 12 9 6 3 0 Total CAR Tier 1 CAR
2006 2007 2008 2009 IFRS in 2011 and 2012 Source: Fitch, FSS, banks
2010 2011E 2012F
Figure 87
Figure 88

Loan/deposit ratio
(%) 150 120 90 60 30 0 2006 2007 2008 2009 2010 2011E 2012F Including loans to and deposits from banks Source: Fitch, FSS, banks

(%) 20 15 10 5 0 -5 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, FSS, banks Nominal GDP growth Loan growth
25
Banks
Rating Outlook
Sri Lanka
Brighter Prospects: The outlook on the National Long-Term Ratings of most Sri Lankan banks is stable. Growth in the domestic economy since the end of Sri Lankas civil war in May 2009 has improved the earnings prospects of banks, and the governments capacity to support the banking system has improved slightly. However, the rapid pace of loan growth that began in mid-2010, if continued, will test banks risk management systems and funding profiles. Rapid Credit Growth: Fitch expects the performance of Sri Lankan banks to continue to benefit from strong domestic demand. The agency forecasts real GDP to rise by 8% in 2012. Fitch notes that banks are the dominant intermediaries in the system, and the level of credit penetration remains low. In December 2011, Sri Lankas MPI an indicator of potential stress in the banking system was revised to 3 (high) from 1 (low). The MPI identifies the build-up of potential stress in banking systems due to rapid credit growth associated with bubbles in housing or equity markets or real exchange rates which have appreciated. Credit growth in Sri Lanka in 2010 and 2011 has been amongst the highest in emerging markets; and together with an increase in equity prices, has triggered the increase in the MPI.
STABLE
Sri Lanka a Banking system indicator is not available 3a
Better economic conditions support banks performance. Managing rapid credit growth a potential challenge.
Figure 89
Sri Lanka Banks: Rating Outlooks

(%) 100 80 60 40 20 0 Positive Stable Negative Note: Based on National Ratings Source: Fitch
Manageable Asset Quality: Fitch remains concerned about the Sri Lankan systems ability to manage sustained loan expansion above the historical average that could push up system NPLs. Asset quality could be affected by the knock-on effects of a global economic environment which is still uncertain. Fitch believes that asset quality may not deteriorate immediately to the levels reached in 2008 and 2009; but the agency does, however, recognise the need for banks to enhance loss-absorption capacity by increasing Tier 1 capital. Sustained Healthy Profitability: Fitch expects strong loan demand, manageable credit costs and reduced effective taxes to offset competitive pressure on net interest margins and potentially higher operating costs, supporting healthy profitability (see Figure 90). Increased Non-Deposit Funding: Continued strong loan expansion that outstrips the rise in deposits is likely to stretch the Sri Lankan banking systems loan/deposit ratio further (see Figure 94). Fitch expects deposits to remain the main source of funding for Sri Lankan banks, supported by their domestic franchises, although increased non-deposit funding may be needed to support lending. Strain on Capitalisation: Fitch expects capital ratios to come under pressure (see Figure 93), as loans are likely to increase at a faster pace than internal capital generation. Fitch feels that capital conservation is needed to support capitalisation to ensure that an adequate buffer is maintained in light of loan growth levels, credit concentrations, the level of loan-loss reserve coverage and exposure to macroeconomic volatilities.

Related Research
2012 Outlook: Sri Lankan Banks (January 2012)
Negative Rating Triggers: A significant reversal of policy direction and/or macroeconomic shocks and/or rapid lending that puts pressure on liquidity, earnings or asset quality resulting in substantial capital impairment could be negative for the outlooks and/or ratings of Sri Lankan banks. Positive Rating Triggers: Structural changes such as improvements to risk management and enhanced capital buffers could be positive for the outlooks and/or ratings of Sri Lankan banks.
Analysts
Rukshana Thalgodapitiya +94112541900 rukshana.thalgodapitiya@fitchratings.lk Ramali Perera +94 11 254 1900 ramali.perera@fitchratings.lk Ananda Bhoumik +91 22 4000 1720 ananda.bhoumik@fitchratings.com
26
Banks
Figure 90 Figure 91
Sri Lanka: Key Performance Trends

(%) 2.0 1.6 1.2 0.8 0.4 0.0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, 12 local banks rated by Fitch ROA (LHS) ROE (RHS) (%) 25 20 15 10 5 0

Credit costs
(%) 30 24 18 12 6 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, 12 local banks rated by Fitch Of pre-provision profits (LHS) Of average loans (RHS) (%) 1.0 0.8 0.6 0.4 0.2 0.0
Figure 92
Figure 93

(%) 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, 12 local banks rated by Fitch

Capital ratios
(%) 20 16 12 8 4 0 2006 Total CAR Tier 1 CAR
2007
2008
2009
2010 2011E 2012F
Source: Central Bank of Sri Lanka (CBSL), Fitch
Figure 94
Figure 95

Loan/deposit ratio
(%) 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, 12 local banks rated by Fitch

(%) 40 30 20 10 0 -10 2006 2007 2008 2009 2010 2011E 2012F Source: CBSL, Fitch Nominal GDP growth Loan growth
27
Banks
Rating Outlook
Taiwan
Stable Credit Profiles: The ratings of the Taiwanese banks assessed by Fitch are underpinned by strengthened loan-loss provisions and a low-to-moderate level of risk-taking in loan growth, as well as generally improved capitalisation during 2009-2011. Selected state banks are less well capitalised, and need to replenish their capital; otherwise, their VRs will be challenged as they are most likely to be influenced by government polices to support financially weak corporate credits amid a likely cyclical economic downturn. Credit Risks To Increase: Fitch expects credit costs to rise after a benign domestic credit environment during 2009-2011. The softening property market has increased potential credit losses in real estate-related lending. The risk of lumpy credit losses could arise from concentrated credit exposure to large industrial companies in some consumer electronics supply chains which are experiencing intensifying competition and challenges in innovation. Provisions Strengthened: Banks stepped up provisioning in 2010-2011 to meet the regulatory demand for general provisions (GP) at 0.5% of performing loans, effective from 2011, which is likely to be raised to 1%. Fitch takes a positive view on the tougher provisioning rule to prepare banks for unexpected credit losses. The agency estimates that system-wide GP/performing loans would have risen to about 0.8% at end-2011, much higher than 0.2% at end-2009, while NPLs (90 days past due) would have been below 0.5% of total loans and were well provisioned.
STABLE
Taiwan C1
Enhanced loan-loss provisions and capitalisation enable banks to withstand a moderate level of stress. Concentrated tech exposure following a major credit risk.
Figure 96
Taiwanese Banks: Rating Outlooks

Capital for Moderate Stress: Taiwanese banks are generally reasonably capitalised (with a system-wide core Tier 1 capital ratio estimated at 9.5% at end-2011) to withstand a moderate stress of 80bp (of assets) in credit cost. This would be well above the 10bp-32bp credit cost in 2009-2011, but substantially lower than the historical peak of near 200bp experienced in the early 2000s. Maintenance of adequate loss-absorption buffers in capital and loan-loss provisions are vital, as most banks are weak in internal capital generation. Liquid and Deposit-Funded: Liquidity is likely to remain ample in Taiwans banking system in 2012, underpinned by a record funding surplus (deposits exceeding loans) and investment in central bank paper. Basel IIIs liquidity standards may induce some banks to lengthen their funding tenor profile, but is unlikely to alter the overall funding structure to any extent given the availability of the systems stable retail deposit base. Lower Profit Forecast: Fitch believes it is unlikely that the benign credit costs of 2009-2011 will continue throughout 2012 against the weakened growth prospects of the global economy and the consequent slowdown of Taiwans important export sectors. Revenue growth should be limited by weak demand for credit, soft pricing in a likely protracted period of low interest rates, and fragile investment market sentiment. Fitch predicts banks profitability and earnings to fall moderately in 2012.

Related Research
Taiwanese Banks Exposure to Technology Industry: Display Panel Makers a Risk (August 2011) Outlook: Taiwanese Banks (April 2011)
Analysts
Jonathan Lee +886 2 8175 7601 jonathan.lee@fitchratings.com Sophia Chen, CFA, CPA +886 2 8175 7604 sophia.chen@fitchratings.com Cherry Huang, CFA +886 2 8175 7603 cherry.huang@fitchratings.com
Negative Rating Triggers: Excessive growth is ratings negative, particularly that driven by unrestrained ventures into unfamiliar overseas markets. A disruptive slowdown in the Chinese economy will pressure Taiwanese banks asset quality through increasingly close trade flows and credits mobilised by Taiwanese corporations for use in mainland China. Downward rating pressure may also emerge from weakened credit standards for growth and corporate credit events that would dilute a banks loss-absorption capacity to a meaningful extent. Positive Rating Triggers: Fitch sees limited upside to Taiwanese banks ratings, reflecting their lack of pricing power as well as weak internal capital generation and relatively modest capital profiles by international standards. Niche and profitable business models, managed with firm asset quality, is ratings positive, but often difficult to achieve in this market.
28
Banks
Figure 97 Figure 98
Taiwan: Key Performance Trends

(%) 1.5 1.0 0.5 0.0 -0.5 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, Central Bank of the Republic of China (Taiwan) (CBC) ROA (LHS) ROE (RHS) (%) 9 6 3 0

Credit costs % PPOP and loans
(%) 120 90 60 30 -3 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, CBC 0.0 Credit costs PPOP (LHs) Credit costs loans (RHS) (%) 1.2 0.9 0.6 0.3
Figure 99
Figure 100

(%) 2.5 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, CBC

Capital ratios
(%) 15 12 9 6 3 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, CBC Total CAR Tier 1 CAR
Figure 101
Figure 102

Loan/deposit ratio
(%) 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, CBC

Asset quality - NPL reserve coverage ratio
(%) 240 200 160 120 80 40 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, CBC
29
Banks
Rating Outlook
Thailand
Resilient Despite Potential Shocks: The stable outlook on major Thai banks is based on Fitchs expectation that the banks will remain resilient in the face of economic shocks caused by the severe flooding in Q411 and potential contagion effects of the eurozone crisis. Their maintenance of strong capital and profitability, as well as an expected post-flood economic rebound, should help carry them through a challenging year. Post-Flood Rebound: The severe flooding has affected manufacturers in key industrial estates, as well as SMEs that form part of their supply chain and people living in Thailand's central region. This is likely to result in negative GDP growth in Q411 as business and spending have been disrupted. In 2012, Fitch expects a strong post-flood rebound in: economic activity; loan demand for the rehabilitation of damaged properties; and spending on future flood protection. Fitch forecasts GDP to rise by 4.0% in 2012 as the economy rebounds from the earthquakeand flood-related supply-chain shocks of 2011. Moderately Higher NPLs Expected: Regulatory forbearance by The Bank of Thailand has allowed banks and non-bank financial institutions that provide financial assistance to floodaffected borrowers to maintain the existing credit status of their customers over the next six to 12 months. Based on these guidelines, banks have so far estimated a moderate increase in NPLs and provisions in 2012. This implies that asset quality would be weaker than the reported ratios indicate.
Negative
STABLE
Thailand C1
Strong capital and profitability to help absorb potential economic shocks. Expect moderate increase in NPLs from floods. Funding risk mitigated by prospective new regulations.
Figure 103
Thai Banks: Rating Outlooks

(%) 100 80 60 40 20 0 Positive Source: Fitch Stable
More Cautious on Funding: A surge in issuance of bills of exchange (B/Es) by Thai banks in 2011 has made Fitch more cautious over their funding structures, particularly smaller banks which are more vulnerable to funding risks. However, the concern could be alleviated by prospective new B/E regulations being drafted by the regulators in 2012. The areas under discussion include raising the minimum denomination and charging fees on outstanding B/Es which Fitch expects will help curb the growth in B/E issuance. Capital Cushion: In spite of potential increased provisioning, the strong Tier 1 capital ratio of the seven largest banks (September 2011: 11.05%) and improved loan-loss coverage should be able to absorb such risks, even in a severe stress scenario, although a few banks with lower reserves and profitability could be heavily hit.

Worse-Than-Expected Impact: Downside risk to Fitch's view could stem from a delayed recovery process, which could lead to a significantly worse-than-expected impact on asset quality and provisioning, to the extent that capital strength is compromised. This could lead to Fitch's outlook on major Thai banks being revised to negative with negative rating action on affected banks also likely. Increased Funding Risk: A significantly increased reliance on non-deposit funding in the domestic market or on foreign-currency wholesale funding due to higher exposure to foreigncurrency lending, could lead to increased liquidity risk in a volatile funding environment in particular for small- to medium-sized banks. This could have negative implications for the overall outlook.
Related Research
Fitch: Thai Financial Institutions Resilient to Flood Impact (October 2011) Thailand Floods Assessing the Impact on the Thai Sovereign Profile (October 2011) Outlook 2012: Major Thai Banks (December 2011)
Analysts
Patchara Sarayudh +66 2655 4755 patchara.sarayudh@fitchratings.com Wasant Polcharoen +66 2655 4758 wasant.polcharoen@fitchratings.com Narumol Charnchanavivat +66 2655 4763 narumol.charnchanavivat@fitchratings.com
30
Banks
Figure 104 Figure 105
Thailand: Key Performance Trends


Credit costs
Figure 106
Figure 107

(%) 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011E 2012F

Capital ratios
Source: Fitch, banks
Figure 108
Figure 109

Loan/deposit ratio
(%) 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks

NPL reserve coverage ratio
(%) 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks
31
Banks
Rating Outlook
Vietnam
Volatile Operating Conditions: The ratings of the major Vietnamese banks are amongst the lowest in Asia, reflecting Fitchs belief that the local operating environment will stay challenging. This is particularly due to persistently high inflation, interest rates and tight domestic liquidity, which have already strained banks' asset quality and funding. However, such risks may be partly counterbalanced by government efforts to bring about some economic stability and banking system restructuring, although success in execution remains to be seen. Regulatory Push for Consolidation: Fitch believes that the broader financial system will benefit from banking sector consolidation, noting that smaller banks are fairly dependent on interbank borrowings and may therefore be disruptive to the financial sector in an insolvency scenario. This development is in line with the regulators aspirations, although more progress is needed in view of the high number of small banks in Vietnam.
STABLE
Vietnam E2
Difficult operating environment to continue into 2012.
Figure 110
Vietnamese Banks: Rating Outlooks

Tight Funding and Liquidity: While loan growth in 2012 may stay modest, the loan/deposit ratio could remain above 100%. Against an environment of rapidly rising prices, the regulatory cap on deposit rates at a level that is lower than the reported inflation rate moderates the funding flexibility of Vietnamese banks. Furthermore, there is some reliance on wholesale borrowing, which exposes banks to refinancing risks in a liquidity-crunch scenario. Weak Capital Position: Fitch assesses that greater capital buffers are required to mitigate the structural and volatile conditions in the domestic environment. The reported average Tier 1 capital ratio of the major banks was about 9% in 2011, which is low by regional comparison. However, capitalisation has been rising gradually since 2009, owing largely to efforts to raise equity, together with slower loan growth. Strategic foreign investments (capped at a minority stake) in the local banks may bring about positive changes, albeit more likely in the longer term. Asset Quality Deterioration: Asset quality is likely to weaken further. Borrowers face refinancing risks in view of the local banks tight liquidity; a substantial devaluation of the Vietnamese dong against the US dollar increases the risks of foreign-currency loans (about 20% of loans); and a prolonged financial burden from the high interest rates and inflation. In addition, several real estate companies and state-owned enterprises (SOEs) have reportedly been facing repayment difficulties, which led in turn to a rise in NPLs in 2011. NPLs are Understated: Transparency remains an issue. Reported NPLs under the Vietnamese Accounting Standards (VAS) may be understated by 3x-4x than those under International Financial Reporting Standards (IFRS); and are largely categorised as special mention (one category before NPLs). Fitch notes that some banks are still classifying loans to the troubled state-owned enterprise Vietnam Shipbuilding Industry Group and even lossmaking SOEs as performing. Profitability Likely to Moderate: While the major Vietnamese banks have reported earnings growth in 2011, Fitch believes profitability will moderate in 2012 due to intense competition for deposits and a further rise in credit costs.
Related Research
Fitch: Vietnam Banks' Capital Plans Positive; More Needed (October 2011) Fitch: Vietnam Bank Consolidation Is Much Needed Positive Step (December 2011)

Standalone Profiles: There appears to be limited rating upside against the persistently challenging operating environment in Vietnam. Meanwhile, as the major Vietnamese banks ratings are already amongst the lowest in Asia (being in the B category), any negative rating action to the banks VRs which reflect banks standalone credit profiles would suggest an increased threat to the banks solvency position. Sovereign Ratings: Any downward rating action on the sovereign ratings may reflect a similar change in the ratings of state-owned banks, which are premised on state support. At present (January 2012), the sovereign ratings are on a Stable Outlook.
Analysts
Mikho Irawady +65 6796 7230 mikho.irawady@fitchratings.com Alfred Chan +65 6796 7220 alfred.chan@fitchratings.com
32
Banks
Figure 111 Figure 112
Vietnam: Key Performance Trends


Credit costs
(%) 60 45 30 15 0 2006 2007 2008 2009 2010 2011E2012F Source: Fitch, banks Of pre-provision profits (LHS) Of average loans (RHS) (%) 2.5 2.0 1.5 1.0 0.5 0.0
Figure 113
Figure 114

Asset Quality - NPL ratio
(%) 20 15 10 5 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks VAS IFRS (Fitch estimates)

Capital ratios
Figure 115
Figure 116

Loan/deposit ratio
(%) 125 100 75 50 25 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks

(%) 50 40 30 20 10 0 2006 2007 2008 2009 2010 2011E 2012F Source: Fitch, banks Nominal GDP growth Loan growth
33
Banks
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Copyright 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. 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The manner of Fitch's factual investigati on and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of rel evant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreedupon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents i n connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guaran tor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
Related Criteria
National Ratings Criteria (January 2011) Global Financial Institutions Rating Criteria (August 2011) Country Ceilings (August 2011) Rating Financial Institutions Above the Local Currency Sovereign Rating (December 2011)
34

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Banks

2012 Outlook: Asia-Pacific Banks

Asia-Pacific Banks: Rating Outlooks/Watches

What Could Change the Outlook

Australian Banks: Rating Outlooks/Watches

What Could Change the Outlook

2012 Outlook: Asia-Pacific Banks January 2012

Australia: Key Performance Trends

Australia: Key Performance Trends

Australia: Key Performance Trends

Australia: Key Performance Trends

Australia: Key Performance Trends

Australia: Key Performance Trends

2012 Outlook: Asia-Pacific Banks January 2012

Chinese Banks: Rating Outlooks

What Could Change the Outlook

2012 Outlook: Asia-Pacific Banks January 2012

China: Key Performance Trends

China: Key Performance Trends

China: Key Performance Trends

China: Key Performance Trends

China: Key Performance Trends

China: Net New Deposits

Includes non-resident deposits beginning in 2011 Source: PBOC

China: Fitch-Adjusted TSF

China: Wealth Management Products Outstandinga

Incremental change in GDP/ net new financing Source: Fitch, PBOC

2012 Outlook: Asia-Pacific Banks January 2012

Reliance on property collateral. Volatile operating environment. Opportunistic expansion to China.

Hong Kong Banks: Rating Outlooks

What Could Change the Outlook

2012 Outlook: Asia-Pacific Banks January 2012

Hong Kong: Key Performance Trends

Hong Kong: Key Performance Trends

Hong Kong: Key Performance Trends

Hong Kong: Key Performance Trends

Hong Kong: Key Performance Trends

Hong Kong: Key Performance Trends

Hong Kong Banking Sectors Exposure to Mainland China

2008 858 333 1,191 9.9

2009 1,006 379 1,385 11.4

2010 1,622 1,057 2,679 19.2

Jun 2011 2,034 1,639 3,673 24.0

Sept 2011 2,195 1,791 3,986 25.2

2012 Outlook: Asia-Pacific Banks January 2012

Challenges greater than during the 2008 crisis.

Indian Banks: Rating Outlooks

What Could Change the Outlook

2012 Outlook: Asia-Pacific Banks January 2012

India: Key Performance Trends

India: Key Performance Trends

India: Key Performance Trends

India: Key Performance Trends

India: Key Performance Trends

India: Key Performance Trends

2012 Outlook: Asia-Pacific Banks January 2012

Indonesian Banks: Rating Outlooks

What Could Change the Outlook

2012 Outlook: Asia-Pacific Banks January 2012

Indonesia: Key Performance Trends

Indonesia: Key Performance Trends

Indonesia: Key Performance Trends

Indonesia: Key Performance Trends