Asian banks in decent shape, but credit risks lurk

The turmoil in the global banking system over the past month has had a limited impact on Asia – currencies have held up well and outflows of capital have been small. And in general, banking sectors in the region appear to be in good health. Loan-to-deposit ratios are close to or below 100% (Korea is the key exception) and minimal reliance on wholesale financing means that a sudden freezing up of global credit markets or a sharp drop in lending by foreign banks would not be a major concern. A smaller increase in policy rates relative to other EMs mitigates interest rate risk (from unrealised losses on bonds). Banks in the region are also well capitalised and non-performing loan ratios are low. But that is not to say all is clear. In particular, loan loss absorption capacity in some big banks in India, Taiwan and Korea is relatively low. And we will be keeping a close eye on risks from the property sector. Korea and Vietnam look the most exposed. Residential real estate prices have plummeted in Korea, and household debt is high. Meanwhile, developers in Vietnam are struggling with debt repayments.