The coming months will require regional banks to manage growing distressed debts and conserve their capital, causing many to look for partners.
Banks in India, Indonesia and the Philippines are under pressure to consolidate, as bad loans proliferate and growth expectations remain low.
The arrival of vaccines and political change in the United States spurred expectations of a global economic recovery in 2021, but big challenges remain.
The outlook remains bleak for many banks in the Asia Pacific region, with analysts forecasting that the ill effects of the pandemic on retail and business credit profiles will linger all year.
EY Asia Pacific Banking leader Andrew Gilder notes that recovery has already begun, although slowly and unevenly and with an uncertain outlook.
“As vaccines become available and sentiment improves, revenue prospects [for banks] should start to stabilize, particularly in the second half of 2021,” Gilder says.
But factor in regulatory pressure on margins and fees, low interest rates and increased operational costs due to Covid-19 measures, and you have a toxic stew that will continue to weaken near-term profitability and encourage many to search for partners.
Banks with larger exposures to small and medium-size enterprises (SMEs) are especially vulnerable, since smaller businesses have been hit the hardest. “While larger banks remain well positioned to absorb potential NPL [non-performing loan] increases, some less well-capitalized low-tier banks may struggle, and get acquired,” Gilder adds.
In India, 10 public sector banks folded into three in March 2020. “The idea was to merge better banks with badly managed ones to improve the overall NPA load and reduce recapitalization needs” says Delhi-based Rohit Mishra, CEO of Saral Home Finance, a major lender to the unbanked.
“It’s about getting more heft in fewer banks to meet the financing needs of credit-hungry India, especially in industrial and infrastructure sectors,” says Mishra.
Mishra points out that for private sector banks, the Reserve Bank of India is busy nudging them toward acquisition primarily due to governance challenges, such as was the case with Yes Bank, acquired by State Bank of India, the public sector behemoth, and the tiny Lakshmi Vilas Bank, by DBS India.
Loan moratoria around the region have allowed distressed borrowers hit by Covid-19 to defer interest and principal payments. Many non-performing loans are presently hidden by government financial support and are likely to emerge through 2021 as support tapers off.
The coming months will require regional banks to manage growing distressed debts and conserve their capital, causing many to look for partners.
“Malaysia, Indonesia, and Philippines are unlikely to see a return to pre-Covid-19 levels of performance before 2023. Expect consolidation in those markets too,” says Mishra.
