APAC banks structurally vulnerable to private sector influence

Long periods of low interest rates contribute to high leverage levels.

Several banking systems in the Asia Pacific (APAC) remain highly exposed to private sector leverage, according to Moody’s Investors Service.

Leverage levels from private sector players remain high because of unusually long period of low interest rates although it has slowed down significantly this quarter.

The contribution of private sector credit to GDP rose in many APAC countries particularly in 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," said Moody’s SVP Christine Kuo.

China and India are the most exposed to high corporate leverage risks, followed by Indonesia, Vietnam, Korea and Hong Kong.

Japan and New Zealand are the more favorable markets with little exposure to corporate leverage risk.

Rising property prices and interest rates pose additional risk to household leverage with Australia, Korea and New Zealand as the most vulnerable.

Moody’s adds that buildup of these risks and failure to mitigate effects have contributed to some bank downgrades in the past year including downgrading the subordinated debt and capital instruments ratings of DBS, OCBC and UOB in December 2016.