High inflation, interest rates may increase Southeast Asian banks’ loan problems

Both asset quality and profits will weaken but should be manageable, says Moody’s.

Banks in Southeast Asia and India face challenges from high inflation and high interest rates, reports Moody’s Investment Service.

Whilst these will lead to gradual increases in margins and provide a boost to their revenue, it will also eventually lead to potential increases in problem loans, the ratings agency said in a sector report.

“Both asset quality and profitability will weaken, although the extent of deterioration will be manageable. Banks will continue to benefit from steady liquidity and government support,” the report said.

On a net basis, however, asset quality will be broadly stable because banks have already created ample credit reserves to cover new NPLs.

ALSO READ: Singapore banks to report flattish Q4 22 earnings amidst slow global growth

Moody’s in particular zeroed in on Thailand’s banks, noting that their loans to individuals and small and medium-sized enterprises have structural weaknesses and will remain a key source of asset risks for banks

Overall, banks in emerging markets (EM)--which include lenders in Southeast Asia, India, and Indonesia–will face a double whammy from currency depreciation and high inflation.

“Emerging markets’ currencies are under pressure amid a strong US dollar, while interest rates have been rising due to monetary tightening,” Moody’s wrote.