Why private sector leverage levels are high in many APAC banking systems

Leverage levels are particularly high in China, Hong Kong, Singapore, Korea and Vietnam.

Moody's Investors Services says that many banking systems in Asia Pacific (APAC) are still exposed to elevated levels of private sector leverage, although the buildup of such leverage has slowed.

Moody's explains that leverage levels are high in many markets in APAC because of the unusually long period of low interest rates in the region. Specifically, private sector credit as a percentage of GDP rose in 12 of the 14 major Asian systems over the past decade, led by China, Hong Kong, Singapore, Korea and Vietnam.

"Elevated and rising private leverage represent a negative credit development for the banks, because this situation undermines the resilience of borrowers to economic shocks, and constitutes a structural banking system vulnerability," says Christine Kuo, a Moody's Senior Vice President.

"The banks are not only exposed to direct default risks on their exposures, but also to an economy's broader adjustments to a debt overhang, including the risk of an economic slowdown and deep asset price corrections," adds Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer. "The buildup of these long-term risks contributed to a number of Moody's bank downgrades in 2016 and 2017."

Here's more from Moody's:

Moody's report points out that vulnerabilities exist in the APAC corporate sector, although the current slowdown in debt accumulation in most markets and higher economic growth expectations are both positive.

China and India are the most exposed to high corporate leverage risks, followed by Indonesia, Vietnam, Korea and Hong Kong. This assessment is based on Moody's analysis of corporate leverage relative to GDP, interest coverage ratios, and capital structures.

For household leverage, several cyclical developments pose additional risks. These factors include a continued rise in the region's property prices, and — in some systems — still rapid credit growth and rising interest rates.

Moody's analysis of leverage hot spots in Asia suggests that risks posed by household credit are more prevalent in Australia, Korea and New Zealand, and also elevated in the emerging economies of Malaysia and Thailand. Moody's assessment is based on its analysis of household leverage relative to GDP, per capita income, interest rate levels and trends, and property price developments.