Expansion of banks in Singapore, Hong Kong, and Malaysia are likely to continue over the next few years, said Standard & Poors Rating Services (S&P). This is to take advantage of higher yields and the growth potential in emerging markets.
According to S&P’s report, the higher risk and evolving operating conditions in regional economies are likely to counterbalance the revenue and diversification benefits for those banks.
“Overly aggressive overseas expansion could weaken the stand-alone credit profiles of individual banks. We, however, expect these banks’ sound financial profiles, prudent risk management, and potential support from respective governments or parent groups to continue to support the ratings in most cases,” S&P credit analyst Ivan Tan said.
It is noted that key factors in the regional expansion of banks in the countries mentioned are the increasing linkages among various Asia-Pacific economies coupled with fierce competition in home markets.
In a statement, S&P said it expected loan growth in those countries to moderate amid the economic slowdown in 2012, in contrast to the strong expansion in loan book last year.
“Interest margins are also likely to remain low, as interest rate hikes are unlikely in 2012,” it said.
However, neighbouring Asia-Pacific like Indonesia, and Vietnam, together with China and India poses risk for these expansions. These countries have lower per capita incomes, higher policy risks, weaker payment cultures, and more legal uncertainties than Singapore, Hong Kong and Malaysia. This could result in higher credit losses if a substantial economic stress occurs.
S&P expects most rated banks in Singapore, Hong Kong and Malaysia to expand in a measured and prudent fashion. However, sizeable debt funded acquisitions could threaten banks’ capitalisation. Also, execution risks and regulatory uncertainties could bring additional challenges on mergers and acquisitions.