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Coronavirus shock no normal cyclical downturn for Asia Pacific banks

The effects of COVID-19 on banks in Asia-Pacific (APAC) will be more severe than those of a normal cyclical downturn, says Fitch Ratings in its latest report.

Operating environments in the region will be significantly affected over the next two years, with weaker domestic and international economies reducing growth prospects and increasing the risk of asset-quality deterioration.
"We expect these trends to erode banks' loss-absorption buffers, raising their sensitivity to financial stress," the rating agency said.

"Our latest forecasts project a sharp slowdown in global economic growth in 2020. Within Asia, China and India will post their slowest expansion in decades, and growth in many other markets will hit multi-year lows. We expect a recovery in 2021, although most economies will still lag longer-term growth averages and some will not recoup the contraction expected in 2020," it added.

Fitch adopts a 'through-the-cycle' approach in our rating assessments. However, the pandemic is not comparable with a regular cyclical downturn. The downside shock has been faster and deeper than in a normal cycle, and the damage associated with job losses and business closures may linger despite higher 2021 GDP growth in many markets.

"We expect adverse effects on bank profitability will be more enduring than in a normal cycle. In some cases, deterioration in asset quality may not become apparent until next year, when the effect of government policy measures introduced to offset the crisis begins to fade. Reflecting this, we have adjusted our annual sector outlook for bank performances to negative for all 17 banking systems in APAC," Fitch said.