APAC emerging market banks poised for growth in 2024: Fitch ratings

New Delhi [India], December 26 : The Asia-Pacific (APAC) region's emerging-market banking sector is set for a positive trajectory in 2024, according to Fitch Ratings' latest sector outlook.
The favourable economic backdrop, marked by robust growth, is expected to drive improved financial performance, with particular strengths seen in several key markets.
In its sector outlook, Fitch Ratings anticipates that the majority of emerging-market banking systems in the APAC region will report better financial results in 2024.
This optimism is grounded in the expectation of relatively robust economic growth, fostering increased demand for loans.
However, the outlook for China appears less optimistic due to various policy measures aimed at supporting the economy, which could weigh on system growth and profitability in 2024.
Despite these challenges in China, the negative impact is projected to be less pronounced for banks in Fitch's rated portfolio, mainly domestic systemically important banks.
The outlooks for individual banks across the region vary, but overall, the sector outlooks align well with positive bank operating environments (OE) in Indonesia, Vietnam, and India.
Elevated interest rates and near-cyclical-high net interest margins (NIM) are expected to support profitability in much of APAC, with only modest loan deterioration anticipated.
Nominal GDP growth is forecasted to be flat to higher in 2024 for most markets, except Mongolia. In markets like India, Indonesia, Thailand, Vietnam, and the Philippines, banks with large franchises and low-cost deposit bases are expected to be more resilient to high-interest rates.
The rating outlook for banks across the region is predominantly stable, with varying degrees of headroom at current Viability Ratings (VR) levels. Vietnam stands out with a positive rating outlook, mirroring that of the sovereign.
Fitch's macroeconomic forecasts indicate that conditions for new business generation should be mostly better in 2024 compared to 2023.
Nominal GDP and loan growth, expected within the range of mid-single-digits to mid-teens across the region, along with steady employment levels, elevated policy rates, and manageable inflation, are poised to underpin earnings growth.
Margins and profitability are anticipated to hold up best in India, Indonesia, Thailand, Vietnam, and the Philippines. Despite recent rate hikes in Indonesia and the Philippines, Fitch does not foresee a prolonged rising rate cycle.
Instead, a policy rate cut is deemed possible in most APAC emerging markets in 2024.
Geopolitical risks and inflationary pressures are identified as potential challenges that could impact the global economy and, consequently, bank operating environments.
While higher interest rates may boost bank earnings, sustained pressures on costs and reduced investment appetite could weigh on growth and asset quality.
India's banking sector, in particular, has shown significant improvement in 2023, surpassing Fitch's expectations.
The sector is poised for sustained growth in 2024, with improved operating conditions, economic momentum, and robust credit growth supporting asset quality and profitability.
The retail, farm, and SME segments are expected to remain key drivers of loan growth, along with sustained robust growth in corporate lending.
Despite high loan growth, some banks may need to recalibrate their strategies due to rising loan-deposit ratios and tightening liquidity.
Fitch expects the Reserve Bank of India (RBI) to lower policy rates in 2024, potentially benefiting Net Interest Margins (NIMs) and earnings. However, a sustained increase in rates could pose risks to credit demand and asset quality.
The sector's improved capitalization is anticipated to support growth, but effective risk control is highlighted as crucial, especially considering the significant growth in risk appetite across banks, including unsecured retail loans.
While the outlook for India's banking sector remains positive, Fitch emphasizes the importance of monitoring factors such as higher interest rates, risk control, and expected loss provisions to ensure sustained growth in a buoyant environment.
The APAC emerging market banks appear well-positioned for growth in 2024, driven by a conducive economic backdrop, improved operating conditions, and strategic policy measures.
However, vigilance is advised, particularly in addressing potential challenges such as geopolitical risks, inflationary pressures, and effective risk control to sustain the positive trajectory.